Diagram an income utility curve with two points representing a sick state (S) an
ID: 1140523 • Letter: D
Question
Diagram an income utility curve with two points representing a sick state (S) and a healthy state (H). Now diagram two types of insurance: Partial but Fair and Full but Unfair. In doing so, assume that each state happens with a 50% probability. Make your diagram in a way that illustrates the Partial but Fair contract is preferred to the Full but Unfair contract. You should clearly label the expected income from each contract on the x-axis and the expected utility from each contract on the y-axis.
Explanation / Answer
an indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is indifferent. That is, the consumer has no preference for one combination or bundle of goods over a different combination on the same curve. One can also refer to each point on the indifference curve as rendering the same level of utility (satisfaction) for the consumer. In other words, an indifference curve is the locus of various points showing different combinations of two goods providing equal utility to the consumer. Utility is then a device to represent preferences rather than something from which preferences come.[1] The main use of indifference curves is in the representation of potentially observable demand patterns for individual consumers over commodity bundles.[2]
There are infinitely many indifference curves: one passes through each combination. A collection of (selected) indifference curves, illustrated graphically, is referred to as an indifference map.