Economics For Healthcare Managers
4th Edition
ISBN: 9781640550483
Author: Robert H. Lee
Publisher: Health Administration Pr
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Question
Chapter 4, Problem 6E
To determine
Calculate the expected out-of-pocket expenditure and expected insurance benefit.
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Students have asked these similar questions
A person's utility function is U = C1/2 . C is the amount of consumption they have in a given period. Their income is $40,000/year and there is a 2% chance that they'll be involved in a catastrophic accident that will cost them $30,000 next year.
a. Calculate the actuarially fair insurance premium. What would your expected utility be if you were to purchase the actuarially fair insurance premium?
b. What is the most you would be willing to pay for insurance, given your utility function?
The lecture mentions that diminishing marginal utility applies to the consumption of money as well as the consumption of certain food. Can you give another example where diminishing marginal utility applies? Can you think of any example where diminishing marginal utility does not apply?
From utility theory, the demand for insurance depends on the level of risk aversion (i.e. how much you hate uncertainty), the cost of insurance (i.e. if it is within your willingness to pay), as well as wealth. Can you think of anything else that affects demand for insurance?
One of the predictions of prospect theory is that we tend to be overly concerned with relatively small risk. Can you think of any example (besides those given in the lecture) that either speaks to this or is an exception?
1. Suppose a person's utility is equal to U =
Y and the initial income is $80,000. Medical expenses for
a sick person amount to $40,000 and the probability of getting sick is 25%. Assume that the individual
is required to pay the actuarially fair premium (r = p * M).
a.
b.
What is the expected income when you are healthy? When you are sick?
What is the expected utility if you buy insurance? What is the expected utility without
insurance?
C.
What is the actuarially fair premium for the individual?
d. Graph the individual's utility function. Clearly indicate the expected disposable income, utility
with insurance, and expected utility without insurance.
What is the dollar value of the individual's risk premium? Show this on the graph.
How much is the individual willing to pay for insurance?
e.
f.
Knowledge Booster
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- Anita bought a new scooter for $500. She is deciding whether she should insureher scooter against theft. She has recently read in the news that one out of 10 scooters arestolen in her town. She can buy scooter theft insurance at the price of 12 cents per $1 ofinsurance. How much insurance will Anita buy if her utility function is U(C) = 2C + 100?arrow_forwardIs the decision to buy pet insurance strictly an economic decision? Explain.arrow_forwardYou start an insurance company as your first entrepreneurial venture after graduation. Your main product line is malpractice insurance for dentists. After exhaustive research, you learn that settling malpractice claims against careful dentists costs $2,000 and settling malpractice claims against reckless dentists costs $7,500. Individual dentists know whether they are reckless or careful, and your research shows that approximately 20% of dentists are reckless. How much do should you charge for malpractice insurance to break even?arrow_forward
- 2. Two individuals have the same income ($100,000), but different potential healthcare expenses. Person A's probability of having $80,000 in healthcare expenses is 0.5 percent. Person B's probability of having $800 in healthcare expenses is 50 percent. Assume your utility is U = VI where I is your income. Calculate each person's expected income and expected utility. Calculate each person's certainty equivalent. What does value of the certainty equivalent tell you about how much each person would be willing to insure against their loss?arrow_forwardJames has two young children (Finn and lain) who are visiting the doctor for their annual well-child check-ups. The doctor's office charges $105 for well-child appointments. Health insurance pays 100% of the costs associated with well-child visits and does not require a copayment. James' health plan monthly premium is $1,400 and has a $1,000 deductible. How much will James be charged when the appointment is done?arrow_forwardYou are deciding whether or not to purchase insurance. Your income is $100,000 and the chance of you getting sick is 30%. The insurance company is offering you a coinsurance rate of 0. 15 and the utility that you get from your disposable income is U = VY. If you get sick, your medical bills add up to $80,000. Assume that the insurance company charges the actuarially fair premium, and assume that you would purchase the same amount of medical care whether you are insured or not (i. e. M ^ (i) = M ^ u = M ^ *). Economic theory predicts that you will purchase insurance if the expected gain in utility from receiving the insurance payout when you are sick is greater than the expected loss in utility from paying the premium and remaining healthy. Using an expected utility diagram, show your decision process regarding whether to buy insurance or not. then show on the diagram the following: Disposable income if you remain healthy and do not purchase insurance Disposable income if you are…arrow_forward
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