(Question 1) Imagine a new infectious disease emerges, called MARS-21. Every individual has a 5% chance of contracting MARS-21, and all people face equal risk of infection. Treatment costs $50,000 bu

(Question 1)

Imagine a new infectious disease emerges, called MARS-21. Every individual has a 5% chance of contracting MARS-21, and all people face equal risk of infection. Treatment costs $50,000 but is effective, fast, and fully curative – so individuals only consider the financial costs of MARS-21 when evaluating their best course of action.

Now, imagine a vaccine exists, which reduces your risk of infection to 1%.

Someone without insurance would pay up to _____________ for the vaccine, whereas someone with full insurance would pay _______________ .

(First answer / Second answer)

a. 2000 /  0

b. Not enough information

c. 2000 / 2000

d. 0 / 0

(Question 2)

Again, imagine the scenario above, in which there’s a 5% chance of contracting MARS-21 with a cost of treatment of $50,000. Assume

no one takes the vaccine

– what would the actuarially fair premium for full insurance be in this market? Assume there are no taxes or loading fees to consider.

a. 50,000

b. 2,500

c. 0

d. 2,000

(Question 3)

Now, assume that the insurer imposes a 15% coinsurance rate. You should also assume that premiums are paid at the beginning of the year, so the insurer cannot make premiums depend on whether an individual gets vaccinated.

If the cost of treatment is $50,000 and the probability of infection is 1% with a vaccine and 5% without one, what is the most an insured person would pay to get vaccinated?

a. 0

b. 300

c. 2,000

d. 1,700