1. Joe is currently unemployed and without health insurance coverage. He derives utility (U) from his interest income on his savings (Y) according to the following function: U = 5(Y1/2) Joe presently makes about $40,000 of interest income per year. He realizes that there is about a 5 percent probability that he may suffer a heart attack. The cost of treatment will be about $20,000 if a heart attack occurs.

A. Calculate Joe's expected utility level without any health insurance coverage.

B. Calculate Joe's expected income without any insurance coverage

C. Suppose Joe must pay a premium of $1,500 for health insurance coverage which covers for the entire cost of treatment when he gets ill. Would he buy the health insurance? Why or why not?

D. Suppose now that the government passes a law that allows all peoplenot just the self-employed or employedto have their entire insurance premium exempted from taxes. Joe is in the 33 percent tax bracket. Would he buy the health insurance at a premium cost of $1,500? Why or why not? What implications can be drawn from the analysis?

E. Suppose Joe purchases the health insurance coverage (at a premium cost of $1500) and represents the average subscriber, and his expectations are correct. Calculate the loading fee the insurance company will receive.