and the chance of you getting sick You are deciding whether or not to purchase insurance. Your income is $ 10 is 30% . The insurance company is offering you a coinsurance rate of 0. 1 5 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. M ^ (i) = M ^ u = 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. Using an expected utility diagram, show your decision process regarding whether to buy insurance or not, then show on the diagram the following: Disposable income if you remain healthy and do not purchase insurance Disposable income if you are healthy and have purchased insurance Disposable income if you become ill and have purchased insurance Disposable income if you become ill and have not purchased insurance then show on the diagram: Utility if you remain healthy and have not purchased insurance Utility if you are healthy and have purchased insurance Utility if you become ill and have purchased insurance 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? Should you purchase insurance? Why or why not?
and the chance of you getting sick You are deciding whether or not to purchase insurance. Your income is $ 10 is 30% . The insurance company is offering you a coinsurance rate of 0. 1 5 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. M ^ (i) = M ^ u = 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. Using an expected utility diagram, show your decision process regarding whether to buy insurance or not, then show on the diagram the following: Disposable income if you remain healthy and do not purchase insurance Disposable income if you are healthy and have purchased insurance Disposable income if you become ill and have purchased insurance Disposable income if you become ill and have not purchased insurance then show on the diagram: Utility if you remain healthy and have not purchased insurance Utility if you are healthy and have purchased insurance Utility if you become ill and have purchased insurance 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? Should you purchase insurance? Why or why not?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text: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. M ^ (i) = M ^ u = 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. Using an expected utility diagram, show your
decision process regarding whether to buy insurance or not. then show on the diagram the following: Disposable
income if you remain healthy and do not purchase insurance Disposable income if you are healthy and have purchased
insurance Disposable income if you become ill and have purchased insurance Disposable income if you become ill and
have not purchased insurance then show on the diagram: Utility if you remain healthy and have not purchased insurance
Utility if you are healthy and have purchased insurance Utility if you become ill and have purchased insurance 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? Should you purchase insurance? Why or why not?
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