Question 2 A risk averse individual faces uncertainty with two outcomes: good, bad. The individual has income $1260 at good and $840 at bad outcome. The probability of good outcome is 5/7 (so the probability of bad outcome is 1 - 5/7 = 2/7). The individual can buy any non- negative x units of insurance. Every unit of insurance has price Sp and it pays $1 in the event of bad outcome. In this insurance market, the unit price of insurance is known to be p = 2/3. (a) [9 points] Suppose the individual buys x units of insurance. Determine the individual's net income under good income, net income under bad income and the average net income. Draw these three in a diagram as functions of x. (b) [6 points] For the individual: (i) compare full insurance with over insurance and (ii) compare full insurance with partial insurance. Then determine best choice of insurance for the individual