Question

In: Economics

Susan is a self-employed consultant, earning $80,000 annually. She does not have health insurance but knows...

Susan is a self-employed consultant, earning $80,000 annually. She does not have health insurance but knows that, in a given year, there is a 5 percent probability she will develop a serious illness. If so, she could expect medical bills to be as high as $25,000. Susan derives utility from her income according to the following formula:

U = Y^(0.3), (i.e. Y raised to the 0.3 power), where Y is annual income.

a) What is Susan's expected utility?

b) What is her maximum willingness to pay for health insurance?

Solutions

Expert Solution

a)

Probability of illness=p=0.05

Income in case of illness=Yi=80000-25000=$55000

Utility in case of illness=U(55000)=Y0.3=550000.3=26.43071

Probability of no illness=1-p=1-0.05=0.95

Income in case of no illness=Yn=$80000

Utility in case of no illness=U(80000)=Y0.3=800000.3=29.57515

Expected Utility=p*U(55000)+(1-p)*U(80000)

Expected Utility=0.05*26.43071+0.95*29.57515=29.41793 utils

b)

Utility in case Susan is willing to pay a maximum of $X towards insurance=U(80000-X)

We know that in order to be indifferent

Expected Utility in case of insurance=Utility in case of insurance

U(80000-X)=29.41793

(80000-X)0.3=29.417928

80000-X=78591.14

X=80000-78591.14=$1408.86

Maximum willingness to pay for insurance=$1408.86


Related Solutions

Susan is a self-employed consultant, earning $85,000 annually. She does not have health insurance but knows that, in a given year, there is a 5 percent probability (i.e. 0.05) she will develop a serious illlness.
                                                                Demand for Health InsuranceSusan is a self-employed consultant, earning $85,000 annually. She does not have health insurance but knows that, in a given year, there is a 5 percent probability (i.e. 0.05) she will develop a serious illlness. If so, she could expect medical bills to be as high as $20,000. Susan derives utility from her income according to the following formula:U = Y(0.25),(i.e. Y raised to the 0.25 power), where Y is annual income.1. What is Susan's expected utility?...
it does not matter whether an individual is employed or self-employed since he or she can...
it does not matter whether an individual is employed or self-employed since he or she can claim the same expenses under either category as long as the expense was incurred to earn income. Comment of the accuracy of this statement.
when both the self employed health insurance deductions and the premium tax credit are involved for...
when both the self employed health insurance deductions and the premium tax credit are involved for taxpayer the IRS provides two calculations to solve this issue. These methods are called the: a.iteractive and simplified methods b. standard and actual methods c. tangible and simplified methods d.iteractive and streamlined methods
Which is not deductible above the line? A. Self-employed health insurance B Cost of preparing the...
Which is not deductible above the line? A. Self-employed health insurance B Cost of preparing the schedule C (business part) of your tax return C. "Employee" share of the self-employment tax D. "Employment" share of the self-employment tax
When both the self-employed health insurance deduction and the Premium Tax Credit are on a return,...
When both the self-employed health insurance deduction and the Premium Tax Credit are on a return, a circular calculation is generated. Why does this occur? A. This would not occur a taxpayer is not allowed to claim both the self employed health insurance deduction and the Premium Tax Credit. B. Because of the adjustment to income for the self-employed health insurance, modified AGI is affected. The Premium Tax Credit calculation is not affected by changes to modified AGI, so the...
Wai Yeung is a self-employed insurance saleswoman. She started her business on July 1, 2020, and...
Wai Yeung is a self-employed insurance saleswoman. She started her business on July 1, 2020, and ended her first taxation year on December 31, 2020. On July 1, she purchased a car for $32,000 plus 13% HST. The car is financed with a bank loan. From July 1, to December 31, interest costs amounted to $1,960. Wai incurred the following additional expenses relating to her automobile: Repairs and maintenance $ 300 Insurance 1,100 Gasoline 1,700 Parking while on business 420...
Colin, a self-employed consultant, uses a room of his home as a business office. This room...
Colin, a self-employed consultant, uses a room of his home as a business office. This room represents 10 percent of the home’s square footage. This year, Colin incurred the following expenses in connection with his home: Use Table 7-3 and Table 7-4. Home mortgage interest $ 12,980 Property tax on residence 2,200 Homeowner’s insurance 1,475 Utilities 2,100 Furnace repairs 300 Colin purchased the home in 2000 for $225,000. For MACRS depreciation purposes, he allocated $185,000 to the building and $40,000...
Colin, a self-employed consultant, uses a room of his home as a business office. This room...
Colin, a self-employed consultant, uses a room of his home as a business office. This room represents 10 percent of the home's square footage. This year, Colin incurred the following in connection with his home: Home Mortgage interest $12,980 Property tax on residence 2,200 Homeowner’s insurance 1,475 Utilities 2,100 Furnace Repairs 300 Colin purchased the home in 2000 for $225,000. For MACRS depreciation purposes, he allocated $185,000 to the building and $40,000 to the land. a. If Colin’s gross business...
Facts: Frank J. Wilson is a part-time CPA earning wages of $80,000 annually. Mr. Wilson is...
Facts: Frank J. Wilson is a part-time CPA earning wages of $80,000 annually. Mr. Wilson is also a professional blackjack player whose gambling activities rise to the level of a trade or business. In some years he’s won a lot of money (over $1 million in winnings once), and in others he’s lost a lot of money. This year, Mr. Wilson generated $25,000 in winnings and $216,000 playing blackjack. Mr. Wilson keeps meticulous records of his gains, losses and expenses....
Consider an employee who does not have health insurance and must buy her own plan. She...
Consider an employee who does not have health insurance and must buy her own plan. She must divide her $1,000 after-tax income between health insurance (the X-good) that costs $200/mo., and other goods (the Y-good) priced at $1. a. Show the consumer’s initial consumption combination on a graph of her budget constraint. (Hint: She only needs 1 unit of health insurance.) b. This employee is now offered employer-paid health insurance. Show graphically how this employee benefits from employer-paid health insurance....
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT