Suppose an insurance company charges Joe a monthly premium of $120 for a plan with a 50% coinsurance rate. The company has computed that Joe will use an average of 10 units of medical care per month at $20 each.

(a) What is this policy's loading fee?

(b) Suppose insurance premiums is income-tax exempt, and Joe has a 20% marginal tax rate. What is the new effective price of his policy?

(c) Discuss two distinct reasons why the tax subsidy for employer-provided health insurance likely increases premiums.

Jack makes $80,000 a year, but there is a 20% chance he will get sick, in which case his medical bills will effectively lower his income to $50,000. He has a utility function U=ln(I), where I=income (net of medical expenses).

(a) Assume Jack doesn't have health insurance, please calculate his:

(1) Expected income;

(2) Expected utility;

(3) Certainty equivalent;

(4) Risk premium.

(b) Please draw a graph of utility vs. income and label the above values you calculated at the right positions.

(c) Assume Jack is enrolled in a health insurance plan with annual premium $5000 and coinsurance rate 20%, please calculate his:

(1) Expected income;

(2) Expected utility.

(d) Would you suggest Jack be enrolled in the health insurance?