1. Suppose that everyone is risk averse, has the same utility function, and has an annual income of $40,000, but people face different risks to health. Person A has a 30% chance of experiencing a health shock that requires $3,000 in expenses while Person B has a 3% percent chance of experiencing a health shock that requires $30,000 in expenses.

a) Which individual is more risk averse, Person A or person B? Explain.

b) Graphically illustrate that Person B would be willing to pay a greater risk premium for insurance that Person A even though the expected loss is the same for both types of people.

c) Explain why Person B would be willing to pay a greater risk premium for insurance than Person A.