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Suppose that the Live-Long-and-Prosper Health Insurance Company charges $5,000 annually for a family insurance policy. The company ’ s president suggests that the company raise the annual price to $6,000 to increase its profits. If the firm followed this suggestion, what economic problem might arise? Would the firm ' s pool of customers tend to become more or less healthy on average? Would the company ' s profits necessarily increase?

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Principles of Microeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971493

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BuyFindarrow_forward

Principles of Microeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971493
Chapter 22, Problem 2PA
Textbook Problem
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Suppose that the Live-Long-and-Prosper Health Insurance Company charges $5,000 annually for a family insurance policy. The companys president suggests that the company raise the annual price to $6,000 to increase its profits. If the firm followed this suggestion, what economic problem might arise? Would the firm's pool of customers tend to become more or less healthy on average? Would the company's profits necessarily increase?

To determine
The problem ofadverse selection.

Explanation of Solution

It can be inferred that a problem of adverse selection exists. The price of the health insurance reflects the costs of an unhealthy person more than an average, healthy person. So, people who are relatively healthy may observe the rise in the price of insurance and decide not to buy it...

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