homework 2.docx - UHV-SBA Dr Chen HCAD 4354 Economics for...

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UHV-SBA Dr. Chen HCAD 4354 Economics for Healthcare Homework 2 The homework covers the textbook Ch 6-8. You may discuss the questions with classmates. However, it must be your individual work. Copying answer from others will violate ACADEMIC HONESTY policy to cause a failing grade. Please show the derivation process and limit your answers within 5 pages. Highlight the answer for each question in MS Word format. No cover sheet is required. If you don’t know how to edit math notations, just explain the process. Please submit you solution file as an attachment. Q1: (Chapter 6) (10%) Suppose Joe and Leo both face the following individual loss distribution: A. Please calculate the expected loss and standard deviation of the expected loss faced by either Joe or Leo on an individual basis. (Referred to Slide #5 CH 6 Lecture Notes) Probability of loss Amount Loss 0.6 $0 0.3 $40 0.1 $80 The expected loss equals is $16 B. Suppose that Joe and Leo enter into a pooling-of-losses arrangement. Just state what will happen to the expected loss and variability of the expected loss as a result of the pooling arrangement (you don’t need to calculate). In the pooling arrangements the variability of the expected loss would be less and the expected loss will drop as well. Q2: (Chapter 6) (10%) Explain the effect of the following changes on the quantity demanded of health insurance. A. An increase in the tax-exempt fraction of health insurance premiums The quantity demand would increase given the less use price of health insurance. B. A reduction in buyer income The quantity demand would decrease, assuming health insurance is a less than normal. C. An increase in per capita medical expenditures The quantity demand would increase because the potential financial loss due to illness would increase.
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