Would he buy the health insurance

Expected utility level

1. Joe is currently unemployed and without health insurance coverage. He derives utility (U) from his interest income on his savings (Y) according to the following function:

U = 5(Y1/2)

Joe presently makes about \$40,000 of interest income per year. He realizes that there is about a 5 percent probability that he may suffer a heart attack. The cost of treatment will be about \$20,000 if a heart attack occurs.

a. Calculate Joeâ??s expected utility level without any health insurance coverage.

b. Calculate Joeâ??s expected income without any insurance coverage.

c. Suppose Joe must pay a premium of \$1,500 for health insurance coverage with ACME insurance. Would he buy the health insurance? Why or why not?

d. Suppose now that the government passes a law that allows all peopleâ?"not just the self-employed or employedâ?"to have their entire insurance premium exempted from taxes. Joe is in the 33 percent tax bracket. Would he buy the health insurance at a premium cost of \$1,500? Why or why not? What implications can be drawn from the analysis?