Consider the market for accidental life insurance where firms are perfectly competitive (earn zero profit) and advantageous selection exists. Note that, like adverse selection in health insurance, advantageous selection has MC and AC that are positively correlated. Unlike adverse selection, however, MC and AC are increasing in Q under advantageous selection. More specifically, suppose that P = 280 - Q, MC = 40 + 2Q, and AČ = 40 + Q. What is the free market equilibrium price and quantity? What is the socially optimal quantity? What price would support the sale of such a quantity? Are firm profits positive or negative at such a price? What is the deadweight loss from the free market equilibrium? What is the deadweight loss if the market for accidental life insurance is outlawed?

Consider the market for accidental life insurance where firms are perfectly competitive (earn zero profit) and advantageous selection exists. Note that, like adverse selection in health insurance, advantageous selection has MC and AC that are positively correlated. Unlike adverse selection, however, MC and AC are increasing in Q under advantageous selection. More specifically, suppose that P = 280 - Q, MC = 40 + 2Q, and AČ = 40 + Q. What is the free market equilibrium price and quantity? What is the socially optimal quantity? What price would support the sale of such a quantity? Are firm profits positive or negative at such a price? What is the deadweight loss from the free market equilibrium? What is the deadweight loss if the market for accidental life insurance is outlawed?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.4P

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