econ #2 - Alexandra Simonelli Julie Czerepak Ryan Maroney...

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Professor Dave November 29, 2009 Health Econ Assignment #2 1. A. Income Utility Marginal Utility 20,000 50 - 25,000 65 3 27,000 70 2.5 30,000 75 1.67 35,000 83 1.6 40,000 90 1.4 Why does it have this shape? The curve has this shape because as income increases, marginal utility decreases. The curve will flatten out (due to the law of diminishing returns) as he makes more money because the marginal utility of spending money on healthcare related things will decrease. If a person’s income is so large, then they will not really worry much about insurance because they have so much disposable income at hand that they do not need insurance to help pay for medical expenses. B. John can be considered risk –adverse when disutility of a loss > utility of an equal size gain. John does not like uncertainty and the risk that come along with health. The more money he makes (income) the more he is willing to invest into health care in order to try to lessen his risk of healthcare related issues like sickness, death and the expenses that come along with them. The more money he makes, the more important it is for him to be healthy to continue to make the same amount of money. As a risk adverse individual, John will spend more money on insurance and preventative tactics in order to increase his good health and lessen his risk for bad health.
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C. E (y) = (.5)(20,000) + (.5)(20,000)(40,000) 10,000 +20,000 = 30,000 E(u) = (.5)(50) + (.5)(90) = 70 D. John’s loss of utility would be 20. E. The maximum premium that John will pay for insurance of $20,000 is $13,000. By paying a premium of $13,000, John will make $27,000 when he is sick and $27,000 when he is ok. An income of $27,000 gives John total utility of 70 which is equal to his expected utility when he has no insurance. If buying insurance with a premium of $13,000 gives him the same utility as his expected utility with no insurance, John will be indifferent and $13,000 would be the maximum premium he would pay. Anything over
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This note was uploaded on 03/02/2010 for the course ECON 345 taught by Professor Ricks during the Spring '10 term at Bay State.

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econ #2 - Alexandra Simonelli Julie Czerepak Ryan Maroney...

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