Practice Assignments Week 13

1. Suppose you face a choice between a certain income of $2,000, or a 50-50 chance of income of $1,000 or $3,000. Suppose you prefer the 50-50 chance of $1,000 or $3,000.

True or False, and explain: You are risk averse

2. Suppose that a disease affects 4% of the population and that everyone is equally likely to get the disease. Treatment for this disease costs $36,000. Assume that this disease, and necessary treatment, represent the only healthcare costs in this population

a) What is the expected cost of healthcare?

b) True or False, and explain: If people prefer to pay the expected cost of health care with certainty, rather than take on the 4% risk of having to pay the full cost of the treatment, they are risk averse.

3. Francesca believes she faces health costs in the current year of either $5,000 with probability 0.8 or $20,000 with probability 0.2.

a) What is the actuarially fair premium for insurance that fully covers health costs Francesca might incur? Explain your answer.

b) Francesca obtains a major medical and hospital policy that covers all costs, aside from a $1,000 annual deductible and a 20% coinsurance rate. If Francesca actually incurs annual health charges of $4,000, by how much will her health insurance company reimburse