Instead of complete insurance as in exercise 4.5, you have a policy with a $5,000 deductible. What will your expected out-ofpocket spending be? What will your expected insurance benefits be? Assuming that the premium equals 116 percent of expected insurance benefits, do you prefer the policy with a $5,000 deductible or the policy with complete coverage? Explain.

Exercise 4.5

You have a 1 percent chance of having healthcare bills of $100,000, a 19 percent chance of having healthcare bills of $10,000, a 60 percent chance of having healthcare bills of $500, and a 20 percent chance of having healthcare bills of $0. What is your expected spending? Would you be willing to buy complete insurance coverage if it cost $3,712? Explain.