Please show work and/or explain how you arrived at your answer (numerical answers with no explanation will not be given full credit).

Assume 100 people join an insurance pool (a group of people insured through community rating).Based on past experience insuring people in this area and based on the age distribution, the insurance company expects a range of anticipated health insurance claims as shown in the table below.

Number of insuredAnticipated Health Claims/year/person

10$600

10750

10900

101050

101200

101350

101500

101650

102250

104500

1.Year 1:

Customers will buy insurance if their anticipated health claims are greater than the premium. Let's say in the first year, all 100 people purchase the insurance plan. What is the highest premium the insurance company could have charged for all 100 people to have joined?

2.Year 2:

The claims experience of the customers is found to be generally consistent with expectations of the insurance company (the table above). What would be the premium in the second year? If those customers who had claims in the first year that were less than or equal to the premium in the second year now decide not to continue to buy insurance, how many will continue to be insured in the second year?

3.Year 3:

What would be the premium in the third year? If those customers who had claims in the second year less than or equal to the premium in the third year now decide not to continue to buy insurance, how many will continue to be insured in the third year?

4.Year 4:

What would be the premium in the fourth year? If those customers who had claims in the third year less than or equal to the premium now decide not to continue to buy insurance, how many will to continue to be insured in the fourth year?

5.Determine what happens in the first four years if there is a $750 penalty for not carrying insurance.Fill in the table below and write one or two sentences about how and why the outcome is different than the outcome in parts A through D.Assume that nothing else changes, except that now the population decides whether to continue purchasing insurance based not only on their anticipated health claims, but also the penalty they will pay if they do not purchase insurance.

PremiumThreshold forTotal number who Total Number

buying insurancehave dropped insuranceRemaining

Yr. 1

Yr. 2

Yr. 3

Yr. 4

6. In a neighborhood with 600 people, the market demand for a flu shot is

Q= 300 - 2P

where Q is the number of flu shots demanded and P is the out-of-pocket price of the flu shot.

a)Assume clinics will provide flu shots at a price of $50.How many people will get flu shots if it is not covered by insurance?

b)How many people will get a flu shot if insurance covers the shot and the customer only pays a $30 co-pay?

c)Briefly describe the moral hazard in terms of the price distortion and responsiveness to the price distortion in this example, and calculate the social loss.

d)Explain why the moral hazard can be justified in this case even though consumption exceeds the natural equilibrium quantity

7. A person's demand for a medical service is given by:

Q = 100 - P

Where P is the out-of-pocket price of the medical service. This person is deciding between the following four insurance options:

Option A: No insurance

Option B: Full insurance

Option C: A plan with 50% coinsurance

Option D: A plan with a $10 copay

a)Calculate the quantity demanded of the medical service under each option A through D if the list price of the service is $50.

b)Which option causes the least amount of moral hazard and why? Which option causes the most amount of moral hazard and why? Your explanations should be one sentence, non-technical explanations (for example, imagine you were explaining this to your grandmother).

c)Using arguments from the article, "The Moral Hazard Myth" (linked above and on Blackboard), explain why the option that causes the least amount of moral hazard or even the second least amount of moral hazard may not be the most desirable option.