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?
Expert's answer

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

Need a fast expert's response?

Submit order

and get a quick answer at the best price

for any assignment or question with DETAILED EXPLANATIONS!


No comments. Be the first!

Leave a comment

Ask Your question

New on Blog