lecturenotes.ppt

:Deductible:whenthepatientpaysallthepriceforacertainrangeCoinsurance:theinsurerpaysonlypartoftheprice,thepatientpaystherestLimits:coverageuptoamaximumamountIndemnityInsurance:reimbursementtothepatientformedicalcosts(oftenfixedpriceperdayinhospital)Serviceinsurance:reimbursementtotheproviderformedicalcostsImpactoftheseondemand?AneconomictheoryofdemandforhealthinsuranceWhydoindividualschoosetobuyinsuranceandhowmuch?BudgetconstraintandpreferencesExpectedutilityanalysisExpectedutilityanalysisRiskaversionSupposewehavethefollowingsituation:$50,%eillandhavetopay$25,000fortreatment.=>1=“good”state2=“bad”stateLetMg=eingoodstateMb=einbadstateSupposeyoucaninsureagainstthelossForexample:supposeyoucanbuy$10ofinsurancecoveragefor$%changeof=>Mb=$50,000–$25,000+$25,000–$2,500Mb=$47,500Mg=50,000-2,500=$47,ursLetY=premiumcost/dollarofcoverageK=dollarsofcoverage=>ingeneral..10%changeofgetting$25,000+K–YK90%chanceofgetting50,000–YKNow,contingentconsumptionNstatesofnatureandconsumptioniscontingentuponwhichstateofnatureyou’=>,00050,000-ykMbAB$25,00025,000+k-ykA=EndowmentB=FullHowdoyouattainpointswhereMb>$50,000–ykByover-insuringInessencebysellinginsurance–ifsuchachoiceispossiblewhichitmaynotbeSlope=∆Mg/∆Mb=-yk/k-yk=-y/1-,howdoprobabilitiesenterinfoutility?Theyshould,shouldn’tthey?IfPg=.9 Pb=.1(shouldgetadifferentchoicethanifPg=1andPb=0Supposem1,m2,m3=einstates1and2P1,P2,P3=probabilityinstates1,2,32definitions:Expectedvalue=P1*M1,+P2*M2+P3*=(.9)(50,000)+(.1)(25,000)=47,500ExplainExpectedutility=P1*u(M1)+P2*u(M2)+P3*u(M3)+….Expectedutilityhypothesis:youchoosethatoptionwiththehighestexpectedutility=