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What quantity of medical care individual choose to consume

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Reference no: EM132268344

Assignment: A. True/False Explain. Indicate whether each of the following statements is true or false and then explain why you think this. Include in your explanation any pertinent institutional details and economic reasoning (including appropriate graphs and equations). Please provide concise, clear answers with minimal irrelevant detail. Explanation is required.

1. In the basic model of demand for insurance in competitive markets, if insurance is actuarially unfair consumers may prefer partial insurance to full insurance.

2. Jimmy owns a lottery ticket that has a 50% chance of winning $1000 (and a 50% chance of paying nothing). Because Jimmy is risk averse, with preferences consistent with the utility function graphed below, he is indifferent between owning the lottery ticket or owning $400 in cash.

True or false: if the probability of the lottery ticket winning decreases to 25%, Jimmy will be willing to sell the lottery ticket for $150.

3. Robinson Crusoe and Friday are shipwrecked on a desert island. Having taken Economics 4001, they know that they should create a market-based system for allocating their scarce resources efficiently, so they develop their own currency. Robinson Crusoe is risk-averse, with utility for dollars given by the graph on the right, while Friday is risk-loving, with utility for dollars given by the graph on the left. Each of them begins with Y dollars, but each faces a 50% (independent) risk of having L dollars stolen by pirates.

True or false: Robinson and Friday can increase social welfare by creating their own market for pirate insurance.

B. Analytical Problems

4. An individual has a health insurance plan with a deductible of $1200 and a coinsurance rate of 50%. Their demand curve is Q=20-(P/10), and the equilibrium market price of medical care is $100 per unit. What quantity of medical care will the individual choose to consume?

5. Demand for Insurance. The next two questions refer to Figure 2 below.
Suppose individual A and B both have a ½ probability of receiving Y and a ½ probability of receiving YL. Individual A is more risk averse than individual B.

a. Label which of the graphs above describes individual A and individual B's utility function.

b. Suppose the insurer offers an actuarially unfair, full-insurance contract. Draw on each of the graphs the maximum administrative costs that each individual would be willing to pay. Is this amount larger for person A or person B?

Information related to above question is enclosed below:

Attachment:- ProblemSet3.rar

Reference no: EM132268344

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