Exercise 2. Consider an individual, or a firm, that has an initial wealth wand a property valued at that is subject to a fire risk. In order to protect himself against the risk, the individual can buy an insurance policy from an insurance company. The company and the individual have the same prior as to the prob- ability that a fire will occur. Denote this probability by p, assumed constant and independent of the individual's effort (alternatively, it depends on the indi- vidual's effort, but as there is symmetric information the insurance contract can demand that the individual exerts the correct effort, i.e. takes the adequate precautionary measures). The individual can insure the entire value of the property, or only a part of this value. Call the amount that he decides to insure 31 The Base Model function is of the form (w) - Co with (w)>0,1/(w) 0,1/(w)