This question is about Risk and Asymmetric Information in Intermediate Microeconomics. Please show all your diagrams, workings, explanations and answers to all parts of the question.

Question Two (10 Marks) Copy the diagram betowfor Fred into your answer book: Utility Income $40,000 (a) What does the curved line drawn on the axis represent? Explain why the line is shaped the way it is. (2 marks) Assume there is a 50% chance that Fred will become it]. and require an operation casting $20,000. He currently has an income 01340, 000. (b) Show on your diagram Fred's expected income and associated utility in this uncertain situation. (2 marks) (c) Show on your diagram the utility Fred would receive if he was able to take out 'fair' insurance against becoming ill. (1 mark) (d) Explain what 't'air' insurance is, and how the fair insurance would be calculated in the example above. (2 marks) (e) On your diagram. show the amount that Fred would be prepared to pay to take out insurance. ( You can use an estimate of the dollar amount for the premium. it doesn't have to be exact so long as you have drawn it correctly). Be sure to state the premium Fred would be prepared to pay. (2 marks) (f) Explain why insurance companies don't charge a 'fair premium'. (I mark)