Homework Help is Here – Start Your Trial Now!
Business
Economics
2. You are deciding whether or not to purchase insurance. Your income is $100,000 and the chance of you getting sick is 30%. The insurance company is offering you a coinsurance rate of 0.15 and the utility that you get from your disposable income is U = VY. If you get sick, your medical bills add up to $80,000. Assume that the insurance company charges the actuarially fair premium, and assume that you would purchase the same amount of medical care whether you are insured or not (i.e. M¹ = M¹ = M*). Economic theory predicts that you will purchase insurance if the expected gain in utility from receiving the insurance payout when you are sick is greater than the expected loss in utility from paying the premium and remaining healthy. a. Using an expected utility diagram, show your decision process regarding whether to buy insurance or not. Calculate and then show on the diagram the following: i. Disposable income if you remain healthy and do not purchase insurance ii. Disposable income if you are healthy and have purchased insurance Disposable income if you become ill and have purchased insurance iii. iv. Disposable income if you become ill and have not purchased insurance b. Calculate and then show on the diagram: C. i. Utility if you remain healthy and have not purchased insurance ii. Utility if you are healthy and have purchased insurance iii. Utility if you become ill and have purchased insurance iv. Utility if you become ill and have not purchased insurance What is the expected decrease in your utility from buying insurance? What is the expected increase in your utility from buying insurance?

2. You are deciding whether or not to purchase insurance. Your income is $100,000 and the chance of you getting sick is 30%. The insurance company is offering you a coinsurance rate of 0.15 and the utility that you get from your disposable income is U = VY. If you get sick, your medical bills add up to $80,000. Assume that the insurance company charges the actuarially fair premium, and assume that you would purchase the same amount of medical care whether you are insured or not (i.e. M¹ = M¹ = M*). Economic theory predicts that you will purchase insurance if the expected gain in utility from receiving the insurance payout when you are sick is greater than the expected loss in utility from paying the premium and remaining healthy. a. Using an expected utility diagram, show your decision process regarding whether to buy insurance or not. Calculate and then show on the diagram the following: i. Disposable income if you remain healthy and do not purchase insurance ii. Disposable income if you are healthy and have purchased insurance Disposable income if you become ill and have purchased insurance iii. iv. Disposable income if you become ill and have not purchased insurance b. Calculate and then show on the diagram: C. i. Utility if you remain healthy and have not purchased insurance ii. Utility if you are healthy and have purchased insurance iii. Utility if you become ill and have purchased insurance iv. Utility if you become ill and have not purchased insurance What is the expected decrease in your utility from buying insurance? What is the expected increase in your utility from buying insurance?

Principles of Economics 2e
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter16: Information, Risk, And Insurance
Section: Chapter Questions
Problem 10RQ: In an insurance system, would you expect each person to receive in benefits pretty much what they...
See similar textbooks
icon
Related questions
Question

Please do B iii and iv and also C

2. You are deciding whether or not to purchase insurance. Your income is $100,000 and the chance of you getting sick is 30%. The insurance company is offering you a coinsurance rate of 0.15 and the utility that you get from your disposable income is U = VY. If you get sick, your medical bills add up to $80,000. Assume that the insurance company charges the actuarially fair premium, and assume that you would purchase the same amount of medical care whether you are insured or not (i.e. Mi = M¹ = M*). Economic theory predicts that you will purchase insurance if the expected gain in utility from receiving the insurance payout when you are sick is greater than the expected loss in utility from paying the premium and remaining healthy. a. Using an expected utility diagram, show your decision process regarding whether to buy insurance or not. Calculate and then show on the diagram the following: i. Disposable income if you remain healthy and do not purchase insurance ii. Disposable income if you are healthy and have purchased insurance iii. Disposable income if you become ill and have purchased insurance iv. Disposable income if you become ill and have not purchased insurance b. Calculate and then show on the diagram: i. Utility if you remain healthy and have not purchased insurance ii. Utility if you are healthy and have purchased insurance iii. Utility if you become ill and have purchased insurance iv. Utility if you become ill and have not purchased insurance What is the expected decrease in your utility from buying insurance? What is the expected increase in your utility from buying insurance? d. Should you purchase insurance? Why or why not? C.
Transcribed Image Text:2. You are deciding whether or not to purchase insurance. Your income is $100,000 and the chance of you getting sick is 30%. The insurance company is offering you a coinsurance rate of 0.15 and the utility that you get from your disposable income is U = VY. If you get sick, your medical bills add up to $80,000. Assume that the insurance company charges the actuarially fair premium, and assume that you would purchase the same amount of medical care whether you are insured or not (i.e. Mi = M¹ = M*). Economic theory predicts that you will purchase insurance if the expected gain in utility from receiving the insurance payout when you are sick is greater than the expected loss in utility from paying the premium and remaining healthy. a. Using an expected utility diagram, show your decision process regarding whether to buy insurance or not. Calculate and then show on the diagram the following: i. Disposable income if you remain healthy and do not purchase insurance ii. Disposable income if you are healthy and have purchased insurance iii. Disposable income if you become ill and have purchased insurance iv. Disposable income if you become ill and have not purchased insurance b. Calculate and then show on the diagram: i. Utility if you remain healthy and have not purchased insurance ii. Utility if you are healthy and have purchased insurance iii. Utility if you become ill and have purchased insurance iv. Utility if you become ill and have not purchased insurance What is the expected decrease in your utility from buying insurance? What is the expected increase in your utility from buying insurance? d. Should you purchase insurance? Why or why not? C.
Expert Solution
steps

Step by step

Solved in 4 steps

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Knowledge Booster
Risk
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
Principles of Economics 2e
Principles of Economics 2e
Economics
ISBN:
9781947172364
Author:
Steven A. Greenlaw; David Shapiro
Publisher:
OpenStax
SEE MORE TEXTBOOKS