1. Draw the payoff diagrams for the following:

a. A high deductible health insurance plan with a maximum out of pocket expense of $12,000 a year

b. A traditional health insurance plan with no deductible but a co-pay of 10% on all healthcare expenses; no maximum out of pocket expenditure limit is specified

c. No health insurance coverage

2. What is the underlying? What type of option is a healthcare insurance (please specify long or short, call or put, or a combination)?

3. Assume that the net liquid asset in the household portfolio is $P where P > $12,000. How does your answer change where P< $12,000. Hint: Ability to declare personal bankruptcy is a put option.

4. What kind of behavior do you expect to see by healthcare providers and consumers based on the information above and for the different plan types?