Q1 : This question follows on from the part of the lecture that discussed the supply of insurance Here instead we are going to look at the demand for insurance , specifically it is that people typically insure large items that are unlikely to be adversely affected , as opposed to smaller items for which the risk of something happening to them is much greater To do so we will again draw on the expected utility framework Suppose that two individuals (A & B) have the same income (Y). Both A and B suffer from health complaints . A has recurring malaria , which reoccurs infrequently with a probability F. When it does however it prevents A from working for a sustained period of time . B rather suffers from regular and fairly pathetic bouts of man flu, with a probability If A gets malaria the treatment (E ) will prove costly and will leave A with income YA: Y = Y- EA If B gets man flu, the medicine purchased will cost (E,) and will leave B with income Y: Y, = Y- E The treatment for malaria costs more than man flu medicine Given that both individuals began with the same income , after both A and B experiencing their respective shocks : The chances of malaria occurring are less than the chances of dental work being required For simplicity we will assume , given E, > E, and PEP, that the expected values of both incomes are the same , such that : E( Y)=E(Y )= YC Assuming both A and B are risk -averse , plot the incomes and expected utility of both individuals in a single figure . How much insurance would both individuals be willing to purchase to maintain a certain income ? What are the implications of this for the type of insurance that individuals buy