Health economics Charles e phelps,, - Essay Example

A risk premium is the average expected loss. Ua represents the utility function of an averse person showing the level of satisfaction at income level Ia. X is the risk premium. The graph above represents the levels of satisfaction of two individuals with different levels of income. Io is the expected value. From the graph, Ia is less than Io meaning that the averse person receive a low income and consequently has a utility level that is lower than the expected utility. In the expected benefit calculation, where “m” is the medical treatment, Pm is its price, f is the probability that an event will occur and C is the co-payment rate, why does it matter that M depends on C?

This is because co-payment helps in the reduction of medical care consumption costs. Without copayment, an individual may not be able to access and afford medical treatment. Copayment is also important when it comes to covers relating to medical services since it helps an individual to prevent unwanted expenses. Therefore, when calculating an individual’s expected benefit, all expenses and benefits incurred or gained on medical services have to be considered. Copayment has to be considered since it covers an individual’s medical expenses and that is why M depends on C during calculation of expected benefit.

This is the trend of individuals with risky lifestyles or jobs to acquire life insurance. It can make the insurance company face screening and signaling problems. Insurance is always more likely bought by individuals who are prone to higher risks than those with low risks. Insurance firms try to reduce the adverse selection problems of having those who insure big risk buying their product. They do this through adjusting prices and measuring risk. Consequently, life insurance firms need medical documents and will not give policies to individuals who have long term illness.