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Sara is temporarily unemployed and without health insurance coverage. She derives utility (U) from her interest income on her savings (Y) according...
Sara is temporarily unemployed and without health insurance coverage. She derives utility (U) fromher interest income on her savings (Y) according to the following function:U = 3(Y1/2) + (Y1/4)Sara presently makes about $40,000 of interest income per year. She realizes that there is about a 3percent probability that she may suffer a heart attack. The cost of treatment will be about $20,000 if aheart attack occurs.A. Calculate Sara’s expected utility level without any health insurance coverage.B. Calculate Sara’s expected income without any insurance coverage.C. Suppose Sara must pay a premium of $1,500 for health insurance coverage with ACME insurance.Would she buy the health insurance? Why or why not?D. Suppose now that the government passes a law that allows all people—not just the self-employedor employed—to have their entire insurance premium exempted from taxes. Sara is in the 33 percenttax bracket. Would she buy the health insurance at a premium cost of $1,500? Why or why not?E. Suppose Sara purchases the health insurance coverage and represents the average subscriber, andher expectations are correct. Calculate the loading fee the insurance company will receive.
