In this question, assume that only one health condition ever afflicts people. Everyone has a 10% probability of being afflicted by the condition (and is aware of this fact). If afflicted, a person can receive one of four treatments. The table below depicts the cost of each treatment and the benefit (measured in terms of willingness-to-pay) afflicted persons receive from each treatment, which is the same for all consumers. Treatment D returns a patient to full health. Non-afflicted persons consume no medical care.

a)If an uninsured person were afflicted, which treatment would we expect them to choose?

b)Which treatment would an afflicted person choose if their health plan covered 80% of all medical expenses (i.e. a 20% coinsurance rate with no deductible or catastrophic cap)?

c) Suppose two types of health insurance policies are available in the market. Policy Y is full coverage, paying 100% of all medical costs. Policy Z pays 80% of all medical costs (i.e. a 20% coinsurance rate with no deductible or catastrophic cap). Assuming that premiums for each plan are set equal to the AFP, fill in the details for the following table:

d)Explain why we might expect a modestly risk-averse consumers to choose Policy Z. Which consumers might prefer Policy Y? Which consumers might prefer no insurance?

e)Suppose a third health plan becomes available that pays 100% of all medical costs, but restricts coverage to Treatments A and B. (That is, policyholders wanting treatments C or D would have to pay for these out-of-pocket.) Are there any consumers who would choose this option? Explain.

Cost (S1000s) 60 100 150 250 WTP ($1000s) 100 150 170 180 Treatment