Consider a consumer facing a two state model of an insurance problem.
Order Description
Consider a consumer facing a two state model of an insurance problem.
(a) Discuss the expected utility approach. Use one or more diagrams to illustrate your
answer.
(b) Formulate and discuss the consumer’s insurance problem in the setting of state
contingent consumption. Use one or more diagrams to illustrate your answer.
Assume that the insurance premium is ‘fair’, i.e. accurately reflects the risk of the bad
outcome occurring.
(c) In the setting of state-contingent consumption, discuss a risk averse consumer’s
optimal insurance choice. Use one or more diagrams to illustrate your answer.

Suggested literature:
Varian H. (2014), Intermediate Microeconomics, Norton, New York: Sections 12.1 to 12.4
Mochrie, R. (2016), Intermediate Microeconomics, London: Chapter 26

word limit not to exceed 1000.