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
, 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.
(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
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)
if health insurance were exempt.
The user price would be (1-0)*(500) =
if health insurance were not exempt.
(8 points) Consider the diagram below, which shows John’s total utility curve, and answer the following questions.
insurance, John’s income is $20,000 if healthy and $10,000 if unhealthy, and medical expenses are $10,000.
of getting sick is 5%.
(Note that we are using “wealth” and “income” interchangeably here.)
What is John’s expected income without insurance?
John’s expected income without insurance is
20,000*(0.95) + 10,000*(0.05) =
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 =
to avoid the uncertainty.
What do we call the amount referred to in part b?
The amount referred to in part b is the
price of insurance
Is John risk-averse, risk-neutral, or risk-loving?
, as he has a declining marginal utility of wealth.