Tom is currently without health insurance coverage. He derives utility (U) from his income (Y) according to the following function: U=2(Y1/4)
Toms income is $85,000 per year. He realizes that there is about a 3 percent probability that he may suffer a heart attack. The cost of treatment will be about $13,000 if a heart attack occurs.
a) Supppose Tom must pay a premium of $3,000 per year for health insurance coverage. Would he buy health insurance? why or why not?
b) Suppose that the government passes a law that allows all individuals to have their entire insurance premium be exempted for taxes. Tom is in the 20 percent tax bracket. Would he buy the health insurance at a premium cost of $3,000? Why or why not?