Insurance Exampleo Initial income = $15,000o Risk averse consumer faces 20% chance of losing$10,000o Actuarially fair insurance premium (AFP) forcovering this risk equals the expected value ofthe loss (.2x$10,000 = $2000)%3DQuestion1) Suppose Al has an income of $25,000 and faces a 20% chance of having a serious medical problemthat requires $15,000 worth of medical care. Al's utility function is U(I) = 10.5 [or square root of income].There are two possible health insurance plans available. The first has 25% coinsurance and has apremium of $2500. The second plan has a $1500 deductible then 25% coinsurance and has a premium of$2200. Which plan would Al choose, if any?What is the AFP for each plan?What is the loading factor for each plan? (loading factor is % by which premium exceeds the AFP)

While taking a medical insurance plan, there are several factors which must be taken into account.…

Answered: 1) Suppose Al has an income of $25,000…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Consider the following information: Patients who are given Treatment A live for one year in Health State q = 0.8 and certainly live for another year in Health State q = 0.5. Patients who are given Treatment B live for one year in Health State q = 1.0 and then either die with probability 70% or live for another year in Health State q = 1.0 with probability !3! 30%. Which of the following statement is TRUE regarding the abovementioned information? If the second year is discounted at rate r= 0.10 then the expected present value QALYS for treatment A and B is 1.35 and 1.33, respectively. O If the second year is discounted at rate r = 0.10, Treatment A and B yield the same more expected present value QALYS. If the second year is discounted at rate r= 0.10, Treatment A yields more expected present value QALYS. If the second year is discounted at rate r = 0.10 then the expected present value QALYS for treatment A and B is 1.25 and 1.27, respectively. O If the second year is discounted at rate…
Now consider a different insurance company that does not have the inclination to tailor contracts specifically to individuals. Instead, it will offer a “standard contract” with the premium r =$100 and payout q=$500 to anyone who will purchase it. a. Peter has healthy-state income IH = $500 and sick-state income IS = $0. He has probability of illness p=0.1. Is the standard contract fair and/or full for Peter? If he ends up getting sick, what will his final income be? b. Tim has IH = $500 and IS = $0, but a probability of illness p = 0.2, higher than Peter’s. Is the standard contract fair and/or full for Tim? How does purchasing the standard contract affect Tim’s expected income?c. Jay has IH =$1, 000 and IS =$0, with probability of illness p=0.2. Is the standard contract fair and/or full for Jay?d. Suppose there is a customer named Ronald for whom the standard contract is partial and actuarially unfair in the insurance company’s favor. Give a set of possible values for Ronald’s IH, IS,…
Question 4 Suppose that there is a 10% chance Ja'Marr is sick and earns $10,000, and a 90% chance he is healthy and will earn $70,000. Suppose further that his utility function is the following (utility = square root of income) U (I) = VIncome Ja'Marr's expected income is O $60,000 O $70,000 $40,000 O $64,000
Suppose the equilibrium price for good quality used cars is $20,000. And the equilibrium price for poor quality used cars is $10,000. Assume a potential used car buyer has imperfect information as to the condition of any given used car. Assume this potential buyer believes the probability a given used car is good quality is .60 and the probability a given used car is low quality is .40. Assume the seller has perfect information on all cars in inventory. How does the informational imbalance result in market failure? a. Only good quality cars are sold, hence the market under-provides used cars. b. Both poor and good quality cars are sold, hence the market over-provides used cars. c. Only poor quality cars are sold, hence the market under-provides used cars. d. Both poor and good quality cars are sold, hence the market efficiently provides used cars.
3.
Which of the following statements is FALSE regarding the concept of "adverse selection"? Multiple Choice Adverse selection describes a situation where an individual's demand for insurance is positively correlated with the individual's risk of loss. Adverse selection occurs when someone increases their exposure to risk when insured. This can happen, for example, when a person takes more risks because someone else bears the cost of those risks. The relationship between smoking status and mortality provides a good illustration for adverse selection, especially in the case in which a life insurance company did not vary its premiums according to smoking status of its customers. To counter the effects of adverse selection, insurers may offer premiums that are proportional to a customer's risk.
Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index . There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost £80,000 which would reduce the income to £10,000. a) Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain. b) What would be the highest price (premium) that she would be willing to pay for an insurance policy that fully insures her against the flooding damage?
See attachment. Whats the the maximum health insurance premium the individual is willing to pay?

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