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Suppose that everyone is risk averse and has the same utility function and an annual income...

Suppose that everyone is risk averse and has the same utility function and an annual income of $50, 000 but people face different risks to health. Person A has a 20% chance of experiencing a health shock that requires $400 in expenses while Person B has a 0.2% chance of experiencing a health shock that requires $40, 000.

(a) Calculate Person As expected loss.

(b) Calculate Person Bs expected loss.

(c) Graphically illustrate that Person B would be willing to pay a greater risk premium for insurance than Person A.

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