Joe is currently unemployed and without health insurance coverage. he derives utility (u) from his interest income on his savings (y) according to the following function:
u = 5(y^1/2)
joe presently makes about $40,000 of interest income per year. he realizes that there is about a 5 percent probability that he may suffer a heart attack. the cost of treatment will be about $20,000 if a heart attack occurs.
a. calculate joes expected utility level without any health insurance coverage.
b. calculate joes expected income without any insurance coverage.
c. suppose joe must pay a premium of $1,500 for health insurance coverage with acme insurance. would he buy the health insurance? why or why not?
d. suppose joe purchases the health insurance coverage and represents the average subscriber, and his expectations are correct. what would be the actuarially fair premium?
e. calculate the loading fee the insurance company will receive when joe pay a premium of $1,500.