a. Ralph is choosing whether to purchase health insurance. Here are the features that define his situation: He currently has $10,000 in initial wealth and faces a 10% chance of a serious illness that will cost $4,000 to cure. He has the option to purchase an insurance policy for the price of $1,500. If he purchases insurance and gets ill, his insurance company will compensate him for the $4,000 cost of the cure. His utility function for money is U(M) = 3*. He has the option to not purchase insurance, but he must pay a fine of $X if he chooses to go uninsured. Set up the equation (but do not solve it) to find the amount of the fine (X) that makes him indifferent between purchasing insurance and going uninsured.

b. Briefly explain why an insurance company's statistical discrimination could be beneficial for you even when you are part of a group that has to pay more because of statistical discrimination.

c. What does the term "marginal utility of money" mean? Explain the intuition behind why someone's risk preference depends on whether the marginal utility of money is increasing, decreasing or constant.