Imagine Two Scenarios

question 16

Essay

Imagine two scenarios.In scenario 1,you have a $1 million health insurance policy.In scenario 2 you do not have health insurance.You earn an income of $40,000 and have $60,000 in savings.In both scenarios,you fall ill with exactly the same serious illness.In scenario 1,you undergo treatment that costs $850,000.In scenario 2,you undergo treatment that costs $50,000.Can you identify the moral hazard costs of health insurance in this case? If so,what are they? If not,why not? Explain your answer.

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Definitions:

Average Accounting Return

A financial ratio that measures the average net income that a firm generates as a percentage of its average book value of equity.

Market Values

The existing selling or buying price for assets or services in the marketplace.

Discounted Payback

A capital budgeting method that calculates the time required to break even on an investment, considering the present value of future cash flows.

Payback

The period of time required to recover the cost of an investment.