With adverse selection, a pooling equilibrium with full insurance can exist if: (a) The fraction of low risk types is suciently small and people are suciently risk averse (b) The fraction of high risk types is suciently small and people are suciently risk averse* (c) The fraction of high risk types is suciently small and people are risk neutral (d) The fraction of low risk types is suciently small and people are risk neutral

The correct answer is (b) The fraction of high risk types is sufficiently small and people are sufficiently risk averse.

Here's why:

Adverse selection refers to a situation where sellers have information that buyers do not have, or vice versa, about some aspect of product quality. In the context of insurance, adverse selection refers to the tendency of those in dangerous jobs or high-risk lifestyles to get life or disability insurance.

A pooling equilibrium refers to a market situation where all types of individuals, high risk and low risk, are pooled together and charged the same price.

For a pooling equilibrium with full insurance to exist in a market with adverse selection, the fraction of high risk types must be sufficiently small. This is because if there are too many high risk individuals, the average cost of insurance will be too high for low risk individuals, causing them to drop out of the market. This would break the pooling equilibrium.

Furthermore, people must be sufficiently risk averse. This is because if individuals are not afraid of the potential risks, they will not see the need for insurance, and again, the pooling equilibrium would break.

Therefore, the correct answer is (b) The fraction of high risk types is sufficiently small and people are sufficiently risk averse.