Do only question 2

Homework Assignment 8 1. Consider the problem we worked through in class. The purpose of this homework question is for you to be able to replicate the resu lts. We are assuming that Pm = $500, C = .20, and L = 8. Calculate the expected benefits, E(B), the insurance company will have to pay. b. Calculate the premium, R, charged by the insurance company, ignoring any tax subsidy. c. Calculate the expected welfare loss, E(WL), from buying this policy. (HINT: the expected welfare loss is the sum of the areas of the two triangles times their probabilities.) d. If the risk premium associated with this policy is $220, how much would the consumer be willing to pay for the insurance? e. Is there a net welfare gain associated with buying this policy? If so, what is it? 2. Now suppose the consumer in problem 1 has a marginal tax rate of t = .30. a. How much money would the consumer have to pay in taxes if they bought this policy with premium R on their own? b. What is the new net welfare gain associated with buying the insurance policy if we take into account the tax subsidy