Let's consider the health insurance market. Suppose there are two types of consumers: those with pre-existing conditions and those without. Those with pre-existing conditions make up 10% of consumers.All consumers are risk-averse with utility function, U(X)=√X. Those with pre-existing conditionsrequire medical care 50% of the time. Those without require medical care 5% of the time.Assume each consumer has an initial wealth of $1000 and medical care costs $500.If the insurance companies are allowed to sell insurance at different prices to the two types ofconsumers and competition forces them to charge the fair insurance premium, consumers without pre-existing conditions✓ insurance at a price of $✓. Consumers with pre-existing conditions✓ insurance at a price of $Now suppose the government passes a law that bans discrimination on the basis of pre-existingconditions. In this case, the insurance companies can no longer offer insurance at two different prices(they can only charge a single price). In this case, in equilibrium, consumers without pre-existingconditionsinsurance at a price of $. Consumers with pre-existing conditions✓ insurance at a price of $Relative to before the law is passed, consumers without pre-existing conditions are✓ off. Consumers with pre-existing conditions are✓ off. 0102547.50100125227.50250buydon't buyare indifferent between buying and not buyingbetterneither better nor worseworseSLeofneiralema-eofe the law is passed, consumers without pre-existing condit

Actuarily fair premium of any insurance is said to that one whose premium is equal to the value of…

Let's consider the health insurance market. Suppose there are two types of consumers: those with existing conditions and those without. Those with pre-existing conditions make up 10% of consume All consumers are risk-averse with utility function, U(X)=√√X. Those with pre-existing condition require medical care 50% of the time. Those without require medical care 5% of the time. Assume each consumer has an initial wealth of $1000 and medical care costs $500. If the insurance companies are allowed to sell insurance at different prices to the two types of consumers and competition forces them to charge the fair insurance premium, consumers without existing conditions ✓ insurance at a price of $ Consumers with pre-existing conditions

Let's consider the health insurance market. Suppose there are two types of consumers: those with existing conditions and those without. Those with pre-existing conditions make up 10% of consume All consumers are risk-averse with utility function, U(X)=√√X. Those with pre-existing condition require medical care 50% of the time. Those without require medical care 5% of the time. Assume each consumer has an initial wealth of $1000 and medical care costs $500. If the insurance companies are allowed to sell insurance at different prices to the two types of consumers and competition forces them to charge the fair insurance premium, consumers without existing conditions ✓ insurance at a price of $ Consumers with pre-existing conditions

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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4. An individual's Bernoulli utility function is u(w) = Vw, and the individual has initial wealth 100. The individual might develop a health problem, which would reduce his or her wealth to 0. The individual might be "healthy" or "unhealthy." A healthy person develops the health problem with probability qL = 0.3, while an unhealthy person develops the health problem with probability qH = 0.7. The probability that the individual in question is healthy is 1/2. An individual knows whether he or she is healthy, but an insurer does not. Without insurance, a healthy person's wealth is 100 with probability 0.7 and 0 with probability 0.3. Without insurance, an unhealthy person's wealth is 100 with probability 0.3 and 0 with probability 0.7. Insurers only offer "full insurance." That is, if the adverse event occurs, they will pay back 100, restoring the individual's full wealth. Insurers set a price for this policy that is "actuarially fair." Insurance company makes no money on average.…
Question 5 Suppose that there is a 10% chance Ja'Marr is sick and earns $10,000, and a 90% chance he is healthy and will earn $70,000. Suppose further that his utility function is the following (utility = square root of income) U (I) = VIncome Ja'Marr's utility from expected income is , and his expected utility of his income is 264.58; 100 248.12; 252.98 100; 265.58 252.98; 248.12
Suppose a company offers a standard insurance contract with a premium (r) of $2,000 and a payout (q) of $10,000. Suppose that Adelia earns a healthy state income of $70,000, a sick state income of $50,000, and has a 20% chance of becoming ill. For Adelia, this insurance contract would be: A. actuarially fair and partial B. actuarially fair and full C. actuarially unfair and full D. actuarially unfair and partial
Suppose an individual earns income $600 when they are sick, and $1000 when they are healthy. Suppose this individual is sick with probability p = 0.5 and has a utility function over income, I, of U(I) = ln(I). Is this individual risk-averse, risk neutral or risk-loving? Suppose she is able to purchase insurance at any amount from at an actuarially fair price. Fully describe the amount she would purchase (payout, premium and final outcomes). Verify that she is better off with the contract in part b, as opposed to being uninsured. Suppose insurance company A offers a payout q = $400 (when she is sick) at a premium of r = $220 and insurance company B offers a payout of $200 at a premium of $100. Company A's contract is: Actuarially fair or unfair? Is it full or partial insurance? Company B's contract is: Actuarially fair or unfair? Is it full or partial insurance? Which contract does this individual prefer? Suppose contract A is unfair, but offers full coverage at price . Contract B…
Consider a competitive insurance market. There are two types of individuals, and there is the same number of each type. The probability that one type has an accident is 1/3, and the probability is 1/10 for the other type. Each individual has a utility function defined over wealth and given by √? where ? is wealth. Without insurance, if there is no accident, the individual wealth is $25,000, but if there is an accident $9,000 are destroyed. This is true of either type.Which of the following statements is false?A. If there is full information, H types pay a premium of $3,000 and L types pay a premium of $900.B. If there is private information about types, the menu of contracts of full information will generate losses for the firms.C. If there is private information about types, at equilibrium L types pay a premium of $78.06.D. If there is private information about types, the pooling contract offering $23,050 in each state attracts all the consumers.
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An individual has 40,000 in income per year. The person will get sick with probability 0.1. If he does get sick, the medical bills will total 30,000. The following tables shows the utility derived from certain amounts of income: Income Utility 40,000 200 37,000 195 35,000 190 30,000 170 20,000 140 10,000 100 At the actuarially fair rate, will the person choose to buy insurance or face the risk of going uninsured? Explain why.
1. Suppose a person's utility is equal to U = Y and the initial income is $80,000. Medical expenses for a sick person amount to $40,000 and the probability of getting sick is 25%. Assume that the individual is required to pay the actuarially fair premium (r = p * M). a. b. What is the expected income when you are healthy? When you are sick? What is the expected utility if you buy insurance? What is the expected utility without insurance? C. What is the actuarially fair premium for the individual? d. Graph the individual's utility function. Clearly indicate the expected disposable income, utility with insurance, and expected utility without insurance. What is the dollar value of the individual's risk premium? Show this on the graph. How much is the individual willing to pay for insurance? e. f.
Consider the following example. A risk-neutral worker can choose high or low effort. The manager cannot observe the worker's action, but the manager can observe the realized revenue for the firm (either $100 or $200). The worker has an outside option of 0. The probability of each revenue depends on the worker's effort: Low effort: cost of effort : $0 probability of low revenue ($100): 75% probability of high revenue ($200) : 25% High effort: cost of effort : $15 probability of low revenue ($100): 25% probability of high revenue ($200) : 75% The manager offers a contract which gives the worker 25% of revenue. Given this payment scheme, the worker will put in (is/is not) ✓incentive compatible. The firm's expected profit is $ The firm is considering an investment that would increase worker morale. By making work more enjoyable, the program would reduce the worker's cost of effort from $15 to $13. If it costs the firm $20 to implement this program, the firm's expected profit if they…
Anita bought a new scooter for $500. She is deciding whether she should insureher scooter against theft. She has recently read in the news that one out of 10 scooters arestolen in her town. She can buy scooter theft insurance at the price of 12 cents per $1 ofinsurance. How much insurance will Anita buy if her utility function is U(C) = 2C + 100?
Do you think Canada's universal health care program can alleviate problems caused by moral hazard and adverse selection in the private insurance markets? Why or why not? John's utility curve over total wealth is given by U(W) =VW (i.e. square root of W). Suppose that he has a 50% chance of being healthy. If he is healthy, he gets all his wealth-$10,000. If he becomes sick, he only has $3,600 remaining after medical expenditures. Calculate John's wealth and utility when he does and does not get sick, his expected utility, expected wealth, and his expected loss. Now he has the option of buying health insurance Calculate the maximum amount John would be willing to pay to fully insure against the cost of the sickness. How much is the actuarially fair and risk premium? Suppose that society consists of large, equal numbers of identical male and identical female consumers. Male consumers are similar to John; female consumers differ only in that they face a 25% probability of being sick, but…
QUESTION 5 A consumer has utility u (I) = √I and income $1,600. The cost of going to the doctor is $1,150, and the cost of going to the gym is $150. If the consumer goes to the gym, the probability of getting sick is 20%; if she does not go to the gym, the probability of getting sick is 80%. When sick, the consumer must go to the doctor. An insurance company is offering a health insurance plan with an insurance premium of $230 and a co-pay of $110 (that is, the consumer must pay the $110 if she goes to the doctor). a) The consumer's expected utility from purchasing this insurance and going to the gym is b) The consumer's expected utility from purchasing this insurance and not going to the gym is c) In this market, the $110 copay ✓ QUESTION 6 A salesperson is trying to sell ca Given her effort e, with probabili The dealership pays her a bonu a) Given the bonus b, the salesp b) Suppose the dealership pays *Select Answer* 34.6061 35.7999 37.0135 43.0338 42.4303 46.2601 fixes the adverse…