1. a) Why do people purchase health insurance? Draw a

1. a) Why do people purchase health insurance? Draw a utility curve defined over income and use it to explain why people are willing to purchase insurance. Label your graph carefully and identify both the expected utility of the risky event and the maximum risk premium the individual would be willing to pay for insurance.

b) How does the likelihood of occurrence and the dollar amount of loss affect the demand for health insurances?

2. Draw demand and supply curves for medical care services and use it to demonstrate how health insurance that lowers the price of medical care to the consumer results in an increase in the use of medical care services. What happens to the total spending on medical care services in your example. Explain your answer.

3. Draw a demand and supply curve for soft drinks in Michigan and label the initial equilibrium price and quantity exchanged. Suppose the State of Michigan imposed a $0.25 tax per soft drink sold in the state in an effort to reduce consumption. Show in your diagram how this excise tax would affect the market for soft drinks in Michigan. What kinds of effects is this likely to have over the long run in our state?

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