1. Consider an individual, Claire, facing the following gamble. With probability p = /10 she will end up in a \"bad state\" and consume z; = 5 and with probability 1 p = 9/10 she will consume z, = 500 in a \"good state\". Consider another individual, Rik, who will end up in the same \"bad state\" with probability & = 1/5 and in the same \"good state\" with probability 1 o = 4/5. Claire's and Rik's utility can be represented as u(x;) = z, where i = g,b and a (0,1]. (a) Derive the coefficient of, respectively, absolute and relative risk aversion and comment on the two individuals' attitudes to risk. (3 marks) (b) Suppose an insurance company offers Rik and Claire 5 of insurance for a premium of 1. How much insurance will Rik and Claire, respectively, buy, and how much will they consume, respectively, in each state? Assume a = /2. (5 marks) (c) How much profit would the insurance company make under the contracts offered in the previous sub