I.1 Demand for Insurance Contracts On an insurance market, insurance contracts (the a's) are traded. To describe how the market works, it is necessary to describe the supply and demand functions of the participants in the market. There are only two kinds of participants, individuals who buy insurance and companies that sell it. Determining individual demand for insurance contracts is straightforward. An individual purchases an insurance contract so as to alter his pattern of income across states of nature. Let W1 denote his income if there is no accident and W2 his income if an accident occurs; the expected utility theorem states that under relatively mild assumptions his preferences for income in these two states of nature are described by a function of the form,