U = 3(Y^1/2) + (Y^1/4)
Sara presently makes about $40,000 of interest income per year. She realizes that there is about a 3 percent probability that she may suffer a heart attack. The cost of treatment will be about $20,000 if a heart attack occurs.
A. Calculate Sara’s expected utility level without any health insurance coverage.
B. Calculate Sara’s expected income without any insurance coverage.
C. Suppose Sara must pay a premium of $1,500 for health insurance coverage with ACME insurance.
Would she buy the health insurance? Why or why not?
D. Suppose now that the government passes a law that allows all people—not just the self-employed or employed—to have their entire insurance premium exempted from taxes. Sara is in the 33 percent tax bracket. Would she buy the health insurance at a premium cost of $1,500? Why or why not?
E. Suppose Sara purchases the health insurance coverage and represents the average subscriber, and her expectations are correct. Calculate the loading fee the insurance company will receive.
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