Assume that the Total Compensation MPL is 2000 a week and a

Assume that the Total Compensation (MPL) is $2000 a week and a marginal tax rate is 25%. Demonstrate numerically that you are better off getting health insurance through your employer than buying on your own health insurance from Health Insurance Company. Assume that health insurance costs $100 per week.

Solution

Solution:

Scenario 1 - If I buy health insurance on my own: My weekly gross total compensation = $2,000.

Compensation I actually receive (post-tax compensation) = 2000*(1 - 0.25) = $1,500

After paying for insurance, amount I have left = 1500 - 100 = $1,400

Thus, my weekly compensation, net off tax and insurance payments = $1,400

Scenario 2 - If I get my health insurance through my employer: My weekly gross total compensation = $2,000

Out of this compensation, if employer pays for my health insurance, my total compensation net off health insurance payment = 2000 - 100 = $1,900

On this compensation, I also pay taxes, so my post-tax compensation = 1900*(1-0.25) = $1,425

Thus, my weekly compensation, net off tax and insurance payments = $1,425

Since $1,425 > $1,400, clearly scenario 2 is better for me.