IncomeEquilibrium- Slope = Wage rate S Tay T90A(365 — TH— T1) Leisure time1. A) (5 points) Refer to...

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IncomeEquilibrium- Slope = Wage rate S Tay T90A(365 — TH— T1) Leisure time1. A) (5 points) Refer to the above figure. Suppose that you have 365 days per year and could earn $200 per day for each day you worked. Also suppose that you are 10 days ill per year (TL=10) and you spend approximately 5 days per year on health enhancing activities (TH=5). Thus the time that you have available for work and leisure is 365- TH-TL. Draw your budget line with respect to your leisure time and income. Show the values on the intercepts. B) (5 points) Suppose that you choose to work 200 days per year. Draw the appropriate indifference curve that is tangent to the budget line. What is your equilibrium yearly income? What is your equilibrium leisure choice (i.e., how many days)? Show on the graph. C) (5 points) Suppose that you increase the time that you spend on health producing activities, TH, from 5 days to 10 days. Correspondingly, suppose that the number of days lost due to illness, TL , has been reduced to 2 days. Also suppose that the improvement in your health status also increased your productivity at work, resulting in a higher wage, $210 per day. Draw the initial budget line and the new budget line on the same graph. Show how your equilibrium level of income and labor-leisure choice will change (i.e., draw the appropriate indifference curves).2. (10 points) Consider a consumer with a medical bill of $1,000. He has a $200 deductible and a 20 percent coinsurance rate. What is his "out-of-pocket" liability for this bill?

Robert · Accepted Answer

Answer to 1: 
A) 
Per day wage rate = $200 
TL = 10 and TH = 5 
Time available for work and leisure = 365-10-5 = 350 
With these values, the budget line (black) has been shown figure1: 
Figure1:
B) 
If the person choose to work for 200 days, then at wage rate of $200 per day, he would earn $40000 
(=200*200). So equilibrium yearly income = $40000 
Given that the person has 350 days in total (for work and leisure), so if person works for 200 days, 
then equilibrium leisure choice would be 150 days (=350-200). 
This has been shown in the figure1 above.
C) 
The new time spent on health activities i.e. TH = 10 days 
And the new value of TL (i.e. time lost due to illness) = 2days 
So, time available for work and leisure =365-10-2 = 353 
The new wage rate = $210, with this wage, the maximum income which the person can earn = 
210*353 = $74130. In this case the, new budget line would shift outward. Since both leisure and 
income are normal goods, so the person would consume more of both leisure and income after this 
change i.e. there would be rise in both equilibrium leisure choice and equilibrium income level after 
these change. 
The new budget line has been shown in red in figure1 above. 
Answer to 2: 
Medical bill = $1000,  
Covariance rate = 20%- it is the percentage of cost of medical expenses the insured individual must 
pay.  
So cost of medical expenses born by the person = 20%*1000 = $200 
Given deductible is $200, so out-of-pocket liability for this bill = deductible + cost of medical 
expenses born by the person = $200+$200 = $400 
Answer to 3: 
Probability of occurring of insurable event = 15% 
Insurer’s loading cost = $200 
Insurance coverage = $2000 
So total cost of insurance company in case of occurring of insurable event = 2000+200 = $2200 
In a competitive insurance market, fair premium is calculated by multiplying probability of 
insurable event with total cost of insurance company in case of occurring of insurable event.  
So competitive premium/fair premium = 2200*0.15 = $330
Answer to 4:
A)  
Given price is $20, if there is no health insurance (i.e. case of 100% coinsurance),

Income Equilibrium - Slope = Wage rate S Tay T9 0 A (365 — TH— T1) Leisure time 1. A) (5 points) Refer to the above figure. Suppose that you have 365 days per year and could earn $200 per day for each...

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