Assignment:
Consider an individual who plans on buying health insurance that promises to compensate the individual for the lost income if the individual gets sick, in exchange for a one-time lump-sum fee/premium to be paid for this health insurance. Assume that there is a 30% chance that the individual will get sick. If sick, her/his income (Is) will be $1,000. If he/she does not get sick, her/his income (Ih) will be $10,000.
a. What is this individual's expected income if he/she does not purchase health insurance?
b. Assuming the individual is risk averse, show in a graph why or why not the individual would be willing to purchase health insurance if its premium/fee is $2,700.
c. Would this person be willing to purchase health insurance if the insurance plan's premium/fee was $3,000? State any assumptions that you make and demonstrate on a graph why or why not.
d. Would your answers to part b and part c change if the individual was risk neutral? Explain how and why or why not.
e. Would your answers to part b and part c change if the individual was a risk seeker? Explain how and why or why not.