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Sara is temporarily unemployed and without health insurance coverage. She derives utility (U) fromher interest income on her savings (Y) according to the following function:U = 3(Y1/2) + (Y1/4)Sara presently makes about $40,000 of interest income per year. She realizes that there is about a 3percent probability that she may suffer a heart attack. The cost of treatment will be about $20,000 if aheart attack occurs.A. Calculate Sara’s expected utility level without any health insurance coverage.B. Calculate Sara’s expected income without any insurance coverage.C. Suppose Sara must pay a premium of $1,500 for health insurance coverage with ACME insurance.Would she buy the health insurance? Why or why not?D. Suppose now that the government passes a law that allows all people—not just the self-employedor employed—to have their entire insurance premium exempted from taxes. Sara is in the 33 percenttax bracket. Would she buy the health insurance at a premium cost of $1,500? Why or why not?E. Suppose Sara purchases the health insurance coverage and represents the average subscriber, andher expectations are correct. Calculate the loading fee the insurance company will receive.
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