Joe is currently unemployed and without health insurance coverage. Show more Question 5. (20 points) 185/#6-3 Joe is currently unemployed and without health insurance coverage. He derives utility (U) from his interest income on his savings (Y) according to the following function: U = 5(Y1/2) Joe presently makes about $40000 of interest income per year.
Joe is currently unemployed and without health insurance coverage. Show more Question 5. (20 points) 185/#6-3 Joe is currently unemployed and without health insurance coverage. He derives utility (U) from his interest income on his savings (Y) according to the following function: U = 5(Y1/2) Joe presently makes about $40000 of interest income per year.
He realizes that there is about a 5 percent probability that he may suffer a heart attack. The cost of treatment will be about $20000 if a heart attack occurs. a. Calculate Joes expected utility level without any health insurance coverage. b. Calculate Joes expected income without any insurance coverage. c. Suppose Joe must pay a premium of $1500 for health insurance coverage with ACME insurance. Would he buy the health insurance? Why or why not? d. Suppose now that the government passes a law that allows all peoplenot just the self-employed or employedto have their entire insurance premium exempted from taxes. Joe is in the 33 percent tax bracket. Would he buy the health insurance at a premium cost of $1500? Why or why not? What implications can be drawn from the analysis? (Hint: Given that health insurance is tax-deductible the effective price of the insurance wil be: 1500 (.3333)1500.) 1000 CHAPTER 6 Concave function utility EXTRA CREDIT (5 points): Suppose Joe purchases the health insurance coverage and represents the average subscriber and his expectations are correct. Calculate the loading fee the insurance company will receive. Show less
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