Question 1:

There is a 1 percent chance (0.01) that you will have a medical bill of $100,000; 19 percent chance (0.19) that you will have a medical bill of $10,000; 60 percent chance (0.6) that you will have a medical bill of $500; and 20 percent chance (0.2) that you will have a medical bill of $0.

A) What is your expected medical spending, without any insurance?

B) If you have complete insurance (i.e. zero deductible, zero copay), what is your expected out of pocket medical spending (EXCLUDING PREMIUM COST)? What is expected benefit (i.e. the expected value of the amount of money that the insurance company is going to PAY FOR YOU) you get from this insurance policy?

C) For the complete insurance policy above, will you be willing to pay a premium of $3712? Explain.

D) Now, assume your have an insurance policy with $5000 deductible, but still zero copay, what is the expected out of pocket medical spending (EXCLUDING PREMIUM COST)? What is the expected benefit you get from this insurance policy?

E) Now, assume the insurance policy in D) is sold at 116 percent (1.16 times) of the expected benefit, do you prefer this policy or the policy from B) with a premium of $3712? Explain.