Question

True, false or uncertainty

A- An individual with utility function U=20Y2 will never purchase health insurance to protect against the risk of lost income due to accident or illness

B- For an indemnity insurance plan with no co-insurance or co-payment, the deductible is the same as the out-of-pocket maximum

Answer 1

A is uncertain as the utility function U=20Y^2 represents convex preferences or the individual is risk lover so will never purchase health insurance but it will also depend on the probability of the risky event.

we maximize expected payoff which is the weighted expectation of payoffs of each event multiplied by its probability of occuring. The shape of the utility curve explains the attitude of the individual towards the event. A person with decreasing marginal utility is risk averse and would always opt for a fair bet while a risk loving individual would have increasing marginal utility as his income goes up. They are always willing to take risk on unfair bet.

The purchase of health insurance depends on the state of nature of a bad outcome. A risk lover might take an insurance with risk premium below what is actuarially fair as he has convex preferences and with increase in income his expected utility is greater than weight average of the utility from each state of nature.

B is True as for an indemnity insurance plan with no co-payment or co-insurance, the deductible which is the amount paid by the insurer to the insurance company doesnot provide full coverage, but there is a limit to what is paid annually to th einsurance network and that limit is derived by out of pocket maximum includes deductibles , copays and co insurance.

Co-pay or co-insuranceis are the fixed amount insurer pays for the routine defined by the insurance plan.