Tom is currently without health insurance coverage.He derives utility (U) from his income (Y)

according to the following function: U =

2 Y

Tom's income is $80,000 per year. He realizes that there is about a 10 percent probability that he

may suffer a heart attack. The cost of treatment will be about $35,000 if a heart attack occurs.

a) Suppose Tom must pay a premium of $3,500 per year for health insurance coverage.Would he buy

the health insurance?Why or why not?Show calculations to receive full credit

b) Suppose Tom becomes eligible to receive employer-sponsored health insurance (ESHI).He is in the

15% tax-bracket (that is, the marginal tax-rate for him is 15%).Would he sign-up for ESHI that

typically has a market price of $4,500.Why or why not?Assume that the entire insurance premium

is tax-exempt.Show calculations to receive full credit.