Calculate the variance and associated risk premium

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Reference no: EM131392749

Consider a simplified model of preventive care. Suppose that there is only one disease, flu, which can be eliminated by taking a flu shot, with a cost of $110. The probability of getting flu is 0.2. Without insurance, the cost of treating the flu is $500. If one buys insurance with a 20% co-pay rate, the treatment cost is $600. The consumer is risk averse with a risk-aversion parameter of -0.002.

Part A. Without insurance:

a. Calculate the expected cost.

P=0.2

EC= p*Cat=0.2x$500=$100

b. Calculate the variance and associated risk premium.

Variamce = p(1-p)

c. What is the net benefit of taking the flu shot? Will you take the shot?

Reference no: EM131392749

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