Consider a simplified model of effect of preventive care on demand for health insurance.The following is model specification.Suppose that there is only one disease, flu, which can be eliminated entirely by taking a flu shot, with a cost of $110.We assume that the consumer has to bear the cost of the flu shot.The probability of getting flu is 0.2.Without insurance, the cost of treating the flu is $600.If one buys insurance with a 20% co-pay rate, the treatment cost is $700.The insurance is offered with a 10% loading.Also the expected welfare loss due to over-consumption under insurance is $8.The consumer is risk averse with a risk-aversion parameter of 0.002.

The consumer in this model thus faces following 4 options: buying insurance but not taking a flu shot (INF); buying insurance and taking a flu shot(IF); not buying insurance but taking a flu shot (NIF); not buying insurance and not taking a flu shot (NINF).

1. Illustrate what is the best option for the consumer by conducting a simple cost benefit analysis.