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1) A county health department is trying to decide whether to offer free flu vaccines to its residents next year. The vaccine protects against the flu strains expected to be most prevalent next year, but does not fully protect against all flu strains.
If the county offers free flu vaccines, it will cost $100,000 initially. There is a 10 percent chance that the vaccine will not fully protect against the flu strain which will be most prominent next year, in which case the county would also need to spend $200,000 on medication to treat residents who contract the flu.
If the county does not offer free flu vaccines, there is a 15 percent chance that the county will experience a flu epidemic, in which case the county would need to spend $800,000 on medication to treat residents who contract the flu.
What advice would you give the county health department if they were risk neutral? What if they were risk-averse? (Assume the discount rate for this period is 0%)
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