Sample Second Test Answers

Sample Second Test Answers - NAME:_SAMPLE SECOND TEST...

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NAME:___SAMPLE SECOND TEST ANSWERS– NOTE YOURS WILL COVER CH. 5 AND WILL BE 1.5 HOURS __ Health Economics Second Test, Georgia State University, Rashad Thursday, February 28 th , 2008, 4:30 – 6:30pm Please put all answers on the question sheet. You have two hours to finish the test. You may use your textbook, notes, and handouts in answering. Please use full sentences when answering. Best of luck. 1. (6 points) Employer-based health insurance is currently fully exempt from federal and state income tax. If the price of health insurance is $500 and the marginal tax rate is 20%, what is the user price of health insurance equal to? What would be the user price if employer-based health insurance were not exempt at all from income tax? The user price would be (1-0.2)*(500) = $400 if health insurance were exempt. The user price would be (1-0)*(500) = $500 if health insurance were not exempt. 2. (8 points) Consider the diagram below, which shows John’s total utility curve, and answer the following questions. Without insurance, John’s income is $20,000 if healthy and $10,000 if unhealthy, and medical expenses are $10,000. The probability of getting sick is 5%. (Note that we are using “wealth” and “income” interchangeably here.) a) What is John’s expected income without insurance? John’s expected income without insurance is 20,000*(0.95) + 10,000*(0.05) = $19,500 . b) How much is John willing to pay to avoid the uncertain income in part a? John would be willing to pay 19,500 – 17,000 = $2,500 to avoid the uncertainty. c) What do we call the amount referred to in part b? The amount referred to in part b is the loading fee or the price of insurance . d) Is John risk-averse, risk-neutral, or risk-loving? John is risk-averse , as he has a declining marginal utility of wealth. 1
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3. (8 points) How would the following factors affect the quantity of health insurance purchased? a) An increase in the degree of risk aversion This would increase the quantity of health insurance purchased. b) An increase in the probability of staying healthy This would decrease the quantity of health insurance purchased (assuming that the probability of being sick is not currently very high – see top of page 140 of textbook). c) An increase in the amount of medical expenses paid if sick This would increase the quantity of health insurance purchased. d)
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This note was uploaded on 02/20/2010 for the course ECON 4210 taught by Professor Rashad during the Spring '10 term at Georgia State.

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Sample Second Test Answers - NAME:_SAMPLE SECOND TEST...

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