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.
2. Illustrate how the answer would change if the cost of flu shot becomes $150.
3. Illustrate how the answer would change if the flu shot now becomes free, either due to the generosity of some philanthropists, or through tax.Briefly discuss the welfare consequence of these two possibilities.