Types of Pecuniary Losses Assignment Project
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Types of Pecuniary Losses Assignment Project
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4.1 Suppose a person is diagnosed with lung cancer. Describe four types of pecuniary losses and two types of nonpecuniary losses that are likely to arise. 4.2 The following table displays uncertainties in John’s monthly income:
State Probability (Θ) Income (Y) Utility (U) Sick 0.4 2,500 U (2,500) Healthy 0.6 4,900 U (4,900)
- What is John’s expected income (expected value of income)? b. Let John ’s utility function be U = Y0.5, where Y is John’s monthly income. Calculate John ’s expected utility of income (expected value of utility of income). c. Compare the utility of John’s expected income and the expected utility of his income. Is John risk averse or not (refer to John ’s utility function given above)?
Explain your answer by a graph, with income on the horizontal axis and utility on the vertical axis. d. Calculate the maximum amount that John is willing to pay to avoid the risk of income loss resulting from becoming sick. 4.3 Based on the same information reported in the above table, calculate the maximum amount that John is willing to pay to avoid the risk of income loss result-ing from becoming sick if the probability of becoming sick increases from 0.4 to 0.5. Is John more likely to buy health insurance than he would under conditions specified in exercise 2? Justify your answer by comparing your results for this question with what you obtained in exercise
- 4.4 Similarly, based on the same information supplied in the above table, calculate the maximum amount that John is willing to pay to avoid the risk of income loss resulting from becoming sick if the amount of income loss increases from 2,400 to 4,000, that is, John receives only 900 when sick. Is John more likely to buy health insurance than under conditions of exercise 2? Why is this so? 4.5 Assume that the individual is a risk lover. The individual can purchase a gamble with a 0.01 probability of winning $10,000. Assume the person has an annual income of $10,000.
What is the actuarial value of the gamble? Show graphically why the person would rather gamble than not, and explain your answer. 4.6 In each of the following pairs, which situation would pose a potentially larger adverse selection problem? Explain your answers. a. A policy covering accidents for all children attending summer camps or a policy covering accidents for college students traveling abroad. b. Inclusion of HIV/AIDS treatment in a standard benefit package offered to teachers or an optional rider providing HIV/AIDS coverage for an additional premium. c.
Basic medical services insurance package offered to students entering college or basic medical services package offered to professors seeking early retirement. d. Optional mental health coverage offered to employees of ABC Inc. or optional mental health coverage offered to children of ABC Inc. employees. 4.7 Considering each of the following pairs, in which of the two is purchase of health insurance more likely. Explain your answers. a. the rich versus the poor; b. hospital care versus a physician office visit; c. a probability of getting sick of 0.95 versus a 0.5 probability of getting sick; d. a tax subsidy (the premium of health insurance is not subject to any form of taxation) versus a tax credit.
Types of Pecuniary Losses Assignment Project Essay
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