Part 2. In this economy there is one insurance company that offers simple medical insurance contracts...
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Part 2. In this economy there is one insurance company that offers simple medical insurance contracts where for a premium P it agrees to reimburse the policy holder an amount C (coverage/reimbursement) if the policy holder incurs medical expenses. The folks in Freedonia must decide whether to buy insurance or remain uninsured. When choosing whether to buy insurance, folks in Freedonia face the following possible monetary outcomes. Probability Medical Expenses P No Medical Expenses 1-p Monetary Outcome No insurance Insurance M-Loss M-Premium Loss + Coverage M M - Premium Suppose that the insurance company can tell if a customer is mostly healthy (Low-Risk) or not so healthy (High-Risk). In this case, it can offer different policies to the two types of folks. 4. For a coverage of C, what is the fairly priced premiums for a mostly health (Low-Risk) customer? And for a not so healthy (High-Risk) one? 5. Write the expression of a mostly healthy folk's expected utility if she buys fairly priced insurance. The expression will include the parameters p and C (for coverage). When offered an insurance policy, folks choose the coverage that maximizes their expected utility. 6. If offered a fairly priced insurance policy, how much coverage would a mostly-healthy person wish to buy? For each policy sold, the insurance company incurs overhead expenses OH = 3. The firm would incur losses if it charged fairly priced premiums. Risk averse individuals, however, are willing to pay more than their fairly price premium to enjoy peace of mind and since it faces no competition, the insurance company offers full coverage policies for the highest premium folks are willing to pay (perfect price discrimination). 7. In Freedonia, what is the highest premium that a mostly healthy folk (Low-Risk) is willing to pay for full coverage? What is the highest premium that a not so healthy folk (High-Risk) is willing to pay for full coverage? Part 2. In this economy there is one insurance company that offers simple medical insurance contracts where for a premium P it agrees to reimburse the policy holder an amount C (coverage/reimbursement) if the policy holder incurs medical expenses. The folks in Freedonia must decide whether to buy insurance or remain uninsured. When choosing whether to buy insurance, folks in Freedonia face the following possible monetary outcomes. Probability Medical Expenses P No Medical Expenses 1-p Monetary Outcome No insurance Insurance M-Loss M-Premium Loss + Coverage M M - Premium Suppose that the insurance company can tell if a customer is mostly healthy (Low-Risk) or not so healthy (High-Risk). In this case, it can offer different policies to the two types of folks. 4. For a coverage of C, what is the fairly priced premiums for a mostly health (Low-Risk) customer? And for a not so healthy (High-Risk) one? 5. Write the expression of a mostly healthy folk's expected utility if she buys fairly priced insurance. The expression will include the parameters p and C (for coverage). When offered an insurance policy, folks choose the coverage that maximizes their expected utility. 6. If offered a fairly priced insurance policy, how much coverage would a mostly-healthy person wish to buy? For each policy sold, the insurance company incurs overhead expenses OH = 3. The firm would incur losses if it charged fairly priced premiums. Risk averse individuals, however, are willing to pay more than their fairly price premium to enjoy peace of mind and since it faces no competition, the insurance company offers full coverage policies for the highest premium folks are willing to pay (perfect price discrimination). 7. In Freedonia, what is the highest premium that a mostly healthy folk (Low-Risk) is willing to pay for full coverage? What is the highest premium that a not so healthy folk (High-Risk) is willing to pay for full coverage?
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Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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