This is a 2 part question. The following data has to be used to complete the answers to part 1 & part 2 of the question. This is for healthcare economics. Here is the data to be used:

Small changes make the original equilibrium impossible.

The same assumption:

a particular type of illness costs about $50,000 to treat.

an insurer considers offering a policy covering only the treatment of that illness.

Type Share Risk of Illness Willingness to Pay (WTP) Expected Cost Calculation

Well 90% 1% $750 $500 $500 = 1% x $50,000

III 5% 10% $7,500 $5,000 $5,000 = 10% x $50,000

Now, what should the insurer charge to break even

$950 = 90 percent $500 + 10 percent $5,000

For the well, $950 > WTP = $750.

For the ill, $950 < WTP = $7,500.

The healthy will drop out of the risk pool.

Only the 10% relatively unhealthy can get insurance and they have to pay very high premium.

Small changes make the original equilibrium impossible.

Type Share Risk of Illness Willingness to Pay (WTP) Expected Cost Calculation

Well 95% 1% $600 $500 $500 = 1% x $50,000

III 5% 10% $6,000 $5,000 $5,000 = 10% x $50,000

In this case, everything goes back to the original (first scenario), EXCEPT that WTP is lower for both groups (but still higher than expected cost (spending). The implication is consumers on average (overall) are less risk averse in this case. (Just to be clear, they are still risk averse, since WTP is still higher than expected cost, but relative to the original scenario, their degree of risk aversion is now lower. If WTP drops to 500 and 5000, exactly the same as expected cost, then consumers are risk neutral.)

Part 1:

Assume that the insurer can NOT distinguish between the two types of consumers, and can offer only one policy (the same policy to everyone).

What will be the breakeven policy premium IF everyone buys the policy?

With such a premium, will everyone actually buy the policy?

Over long run, what will be the equilibrium policy premium in the market and who will get insurance?

Part 2:

Going back to the Scenario in Part 1, assuming that the insurer can NOT distinguish between the two types of consumers, and can offer only one policy (the same policy to everyone). However, a recent technology advancement has lowered the actual cost of the treatment from 50,000 to 45,000.

How does this change the market outcome you found in Part 1? (Hint: follow the exact same analysis you did in the first part) What if the cost is now further lowered to 30,000?