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 = √Y. 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. M³ = 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 Disposable income if you are healthy and have purchased insurance iii. Disposable income if you become ill and have purchased insurance ii.

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 = √Y. 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. M³ = 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 Disposable income if you are healthy and have purchased insurance iii. Disposable income if you become ill and have purchased insurance ii.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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