1. Bob does not have insurance. When Bob is sick his income is IS=$0. When Bob is healthy his income

1. Bob does not have insurance. When Bob is sick his income is IS=$0. When Bob is healthy his income is IH=$40,000. Bob’s probability of getting sick is p=0.25. a.) What is Bob’s expected income without insurance? b.) Plot Bob’s IS, IH, and E[I] in the “Utility-Income” space and in the “IS-IH” space. Label all aspects of the graphs, including the coordinates of all important points. c.) What is the slope of Bob’s Zero-Profit Line? 2. Assume Bob is offered an insurance contract (A) that will give him an income if IS A=$10,000 if he gets sick, and an income of IH A=$30,000 if he stays healthy.

View complete question »1. Bob does not have insurance. When Bob is sick his income is IS=$0. When Bob is healthy his income is IH=$40,000. Bob’s probability of getting sick is p=0.25. a.) What is Bob’s expected income without insurance? b.) Plot Bob’s IS, IH, and E[I] in the “Utility-Income” space and in the “IS-IH” space. Label all aspects of the graphs, including the coordinates of all important points. c.) What is the slope of Bob’s Zero-Profit Line? 2. Assume Bob is offered an insurance contract (A) that will give him an income if IS A=$10,000 if he gets sick, and an income of IH A=$30,000 if he stays healthy. Bob’s probability of getting sick is still p=0.25. a.) What is Bob’s expected income with this insurance contract? b.) Redraw your graphs from the question #1. Add to the new graphs the appropriate dots to capture IS A and IH A under contract A. c.) Given what you know about Bob from question #1, is contract A full or partial? How do you know? d.) Given what you know about Bob from question #1, is contract A fair or unfair? How do you know?

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