Consider a health insurance market. The market has many insurers so that each insurance company offers insurance at the fair insurance premium. Each consumer has utility function, U(X)=√√X and has an initial wealth of $100. Consumers have access to a (magical) gym that reduces their probability of needing to go to the doctor from 90% to 10%. A gym membership costs $10. A trip to the doctor costs $75. Suppose insurance companies charge the fair insurance premium which assumes all consumers go to the gym. This fair insurance premium is $ ✓and the insurance company makes a profit of $ ✓ per consumer. Suppose insurance companies continue to charge the fair insurance premium that assumes all consumers go to the gym, but now charges a copay of $13 for a doctor's visit. The insurance company now makes a profit of $ ✓per consumer. By implementing a copay, the insurance company ✓ the ✓ problem.

Consider a health insurance market. The market has many insurers so that each insurance company offers insurance at the fair insurance premium. Each consumer has utility function, U(X)=√√X and has an initial wealth of $100. Consumers have access to a (magical) gym that reduces their probability of needing to go to the doctor from 90% to 10%. A gym membership costs $10. A trip to the doctor costs $75. Suppose insurance companies charge the fair insurance premium which assumes all consumers go to the gym. This fair insurance premium is $ ✓and the insurance company makes a profit of $ ✓ per consumer. Suppose insurance companies continue to charge the fair insurance premium that assumes all consumers go to the gym, but now charges a copay of $13 for a doctor's visit. The insurance company now makes a profit of $ ✓per consumer. By implementing a copay, the insurance company ✓ the ✓ problem.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter18: Asymmetric Information

Section: Chapter Questions

Problem 18.8P

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