Now let’s assume the mandate to purchase insurance has been repealed, and determine if Bill, a...

Now let’s assume the mandate to purchase insurance has been repealed, and determine if Bill, a high risk person, will continue to buy insurance. Bill’s income when not sick is $50k, but when sick it’s $30k (since if uninsured he would have to spend $20k on health care). If his utility function is u = u(INC) = INC1/2 (i.e., the square root of the amount of income left to spend after health care), and if the probability of Bill being sick is .5, how much would he be willing to pay for health insurance that would cover all health care costs?

	a.	$20,000
	b.	$10,000
	c.	$10,796
	d.	$11,114

Expert Solution

1) income 50000- 20000= 30000*1/2=15000

15000*0.5=7500

2) income 50000-10000=40000*1/2=20000

20000*0.5=10000

3)income 50000-10796=39204*1/2=19602

19602*0.5=9801

4)income 50000-11114=38886*1/2=19443

19443*0.5=9721.5

jeff jeffy answered 2 years ago

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