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Answer to Question #91526 in Microeconomics for ida

Question #91526
Consider the following scenario: Joe’s initial income Y is $10,000. Joe experiences illness with a probability of 20%. Joe’s total medical costs associated with the illness are$1000.
A. What is the amount of medical coverage he should buy?
B. If Joe must pay a premium of $300 for insurance (i.e., 0% coinsurance rate, no deductible), what is the loading fee? 1 Expert's answer 2019-07-11T09:25:16-0400 A. Joe’s expected loss is the difference between his income if he has insurance and his income if he does not. His expected income without insurance is$9,800.

E(I) = 0.8*10 000 + 0.2*(10000-1000) = 8 000 + 1 800 = 9 800

His expected income with insurance is $10,000. He has an expected loss of$200.

B. Expected value = (0.2)(1,000) + (0.8)(−300) = − \$40.00

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