Attempts: 2. Problems and Applications Q2 Suppose that the Live-Long-and-Prosper

Question

Attempts: 2. Problems and Applications Q2 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 premium to $6,000 to increase its profits True or False: If the firm follows this suggestion, individuals who are relatively healthy but didn't have insurance before will now purchase coverage True False ess Y True or False: The effect on company's profits is uncertain. True False Save & Continue

Explanation / Answer

If company increases the annual premium then this will act as dis-incentive for healthy persons to opt for health insurance. Only unhealthy persons will go for health insurance at higher premium.

So, if the firm follows this suggestion, individuals who are relatively healthy but did not have insurance before will now not purchase coverage.

Thus, the given statement is False.

So,

If the firm implements the suggested price increase, the firm's pool of customers will tend to become less healthy on average.

The impact on company's profits will depend on how many healthy customers opt out of health insurance after increase in premium and how much is the number of unhealthy persons in health insurance scheme has increased.

Also, what is the increase in pay-out on account of the increase in number of unhealthy persons opting for health insurance now.

Without such data, it is difficult to state the impact on company's profit.

Hence, the gien statement is True.

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