Economics for Healthcare Managers, Third Edition
3rd Edition
ISBN: 9781567936766
Author: Robert H. Lee
Publisher: Health Administration Press
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Question
Chapter 4, Problem 5E
To determine
Calculate the expected out-of-pocket expenditure and expected insurance benefit.
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and you have a 10% chance of getting sick. Your income when sick is $0 and your income when healthy is $100.
1. Assume your utility over income is U=T ¥
1. Graph your utility and income with income on the x-axis and utility on the y-axis. Show your income/utility when healthy and sick on the graph.
2. calculate your expected income. Show on graph.
3. calculate your expected utility. Show on graph.
1. Now you are offerred health insurance by Prof. Grossman's Totally Full and Fair Insurance Company. For a premium of $20, you will get a payout of $50 if you get sick.
1. Is the insurance company's name accurate (is this actuarially fair and full)?
2. What is the expected payout from this insurance?
3. What is the Income when sick and income when healthy under insurance? Show on your graph
4. What is the expected income and expected utility under this insurance? Show each on your graph
5. Propose a full and fair insurance given your 10% chance of getting sick and your healthy and sick…
A person's utility function is U = C1/2 . C is the amount of consumption they have in a given period. Their income is $40,000/year and there is a 2% chance that they'll be involved in a catastrophic accident that will cost them $30,000 next year.
a. Calculate the actuarially fair insurance premium. What would your expected utility be if you were to purchase the actuarially fair insurance premium?
b. What is the most you would be willing to pay for insurance, given your utility function?
1. Suppose a person's utility is equal to U =
Y and the initial income is $80,000. Medical expenses for
a sick person amount to $40,000 and the probability of getting sick is 25%. Assume that the individual
is required to pay the actuarially fair premium (r = p * M).
a.
b.
What is the expected income when you are healthy? When you are sick?
What is the expected utility if you buy insurance? What is the expected utility without
insurance?
C.
What is the actuarially fair premium for the individual?
d. Graph the individual's utility function. Clearly indicate the expected disposable income, utility
with insurance, and expected utility without insurance.
What is the dollar value of the individual's risk premium? Show this on the graph.
How much is the individual willing to pay for insurance?
e.
f.
Chapter 4 Solutions
Economics for Healthcare Managers, Third Edition
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- Anita bought a new scooter for $500. She is deciding whether she should insureher scooter against theft. She has recently read in the news that one out of 10 scooters arestolen in her town. She can buy scooter theft insurance at the price of 12 cents per $1 ofinsurance. How much insurance will Anita buy if her utility function is U(C) = 2C + 100?arrow_forwardIs the decision to buy pet insurance strictly an economic decision? Explain.arrow_forwardYou start an insurance company as your first entrepreneurial venture after graduation. Your main product line is malpractice insurance for dentists. After exhaustive research, you learn that settling malpractice claims against careful dentists costs $2,000 and settling malpractice claims against reckless dentists costs $7,500. Individual dentists know whether they are reckless or careful, and your research shows that approximately 20% of dentists are reckless. How much do should you charge for malpractice insurance to break even?arrow_forward
- Please do a iv, and b i and iiarrow_forwardJames has two young children (Finn and lain) who are visiting the doctor for their annual well-child check-ups. The doctor's office charges $105 for well-child appointments. Health insurance pays 100% of the costs associated with well-child visits and does not require a copayment. James' health plan monthly premium is $1,400 and has a $1,000 deductible. How much will James be charged when the appointment is done?arrow_forwardPriyanka 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?arrow_forward
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