Answer
See explanation
Work Step by Step
Vanessa pays $\$5,000$ raise, spends all on health insurance
Deductible reduces taxable income by $\$5,000$ → tax saving = 20% × 5,000 = $\$1,000$
Effective spending on health insurance = $\$5,000 − \$1,000$ saved in taxes = $\$5,000$
Outcome: She can now spend $\$5,000$, equal to what HeadBook could have purchased
Preference: She is now indifferent between HeadBook buying insurance or receiving a raise, because the after-tax cost is the same.
