Question

Jackie likes pre-packaged and processed food since she is busy and it saves her time in meal preparation, but she has recently realized that eating pre-packaged and processed food increases her risk of various health problems. Her health-conscious friend estimates that if Jackie continues to eat pre-packaged and processed food, her medical expenses will be $4,000 per year, but if she switches to healthy food, she can reduce her medical expenses to $2,000 per year. Assume that healthy food costs Jackie the same as pre-packaged or processed food, but the monetary equivalent of the utility derived from food enjoyment that Jackie gives up if she switches to healthy food is $700 per year.

a. Suppose Jackie does not have health insurance. Should she stop eating pre-packaged and processed food? Explain.

b. Now suppose that Jackie has purchased a health insurance policy that for an annual premium of $1,800 pays 80% of her medical expenses. Will this insurance coverage change Jackie’s decision with regard to pre-packaged or processed food? Explain. (Hint: Consider her costs and benefits if she eats healthy vs. unhealthily).

c. After the insurance company has sold its insurance policy to Jackie, what kind of information asymmetry problem does it face? Explain. Will the insurance company avoid this problem if it pays only 60% of Jackie’s medical expenses? Explain.

Answer 1

The answer can be given as follows:

RANK DATE CosE Ca 2- In cart o Pe Package (A o 00 Nel 20o0 ast b 2-3300-2600 in Cae

RANKA DATE Heolth Insuvance PAGE Clet 0O CbA) TO 2 Net Bom 37 n c (bs Net B

ppachagel food caltr In sura Gn he band on e leckonm rn rent poiens 60 aste 58o0 Cost Bene г. 2yoot 700 cesk hom Ben

Andl insuance Comp magnituds yJackie) They con