Question: Joe is currently unemployed and without health insurance coverage. He derives utility (U) from his interest income on his savings (Y) according to the following function:

U = 5Y^1/2

Joe presently makes about $40,000 of interest income per year. He realizes that there is about a 5 percent probability that he may suffer a heart attack. The cost of treatment will be about $20,000 if a heart attack occurs.

a. Calculate Joe’s expected utility level without any health insurance coverage.

b. Calculate Joe’s expected income without any health insurance coverage.

c. Suppose Joe must pay a premium of $1,500 for health insurance coverage with ACME insurance. Would he buy the health insurance? Why, or why not?