Demand for Health Insurance (L7)

Question 1

Why buy health insurance?

Answer 1

• hedges from fear of the unknown

Question 2

expected value of income

Answer 2

E[I] = p IS + (1- p) IH

Question 3

expected utility

Answer 3

If the outcomes are x1, x2, . . . , xn, and the probabilities for each outcome are p1, p2, . . . , pn respectively, then:
E[U(X)] = p1 U(x1) + p2 U(x2) + · · · + pn U(xn)

Question 4

For risk adverse people, which is greater, expected utility or utility from expected income?

Answer 4

utility from expected income

Question 5

Synonymous definitions of risk aversion

Answer 5

1. Prefer certain outcomes to uncertain ones with the same expected income.
2. Prefers the utility from expected income to the expected utility from uncertain income U(E[I]) > E[U(I)]
3. Concave utility function
   U’(I) > 0
   U’’(I) < 0

Question 6

insurance premium

Answer 6

payment (r)

Question 7

insurance payout

Answer 7

q

Question 8

final income with insurance

Answer 8

Sick: IS’ = Is + q – r
Healthy: I IH’ = IH + 0 – r

Question 9

Full insurance

Answer 9

regardless of healthy or sick state, income is the same
IH=IS –> q = IH – IS
gets rid of all uncertainty for individual

Question 10

actuarially fair

Answer 10

the premium equals the expected payout

r = pq

Question 11

expected profit

Answer 11

=r-pq

Question 12

unfair insurance

Answer 12

insurance which yields a profit for insurers

r > pq