Suppose there are two types of people. Healthy and Unhealthy. It\'s expensive to

Question

Suppose there are two types of people. Healthy and Unhealthy. It's expensive to insure unhealthy people for obvious reasons. It's relatively inexpensive to insure healthy people because they are unlikely to have large medical bills. Suppose the marginal cost of providing an insurance policy to a Healthy person is dollar 1000 per year and the marginal cost of providing an insurance policy to an Unhealthy person is dollar 4000 per year Once you have a policy, It covers any medical expenses that you incur (i.e the company can't withhold coverage if you turn out to be more expensive to insure than they expected). Assume that insurance companies set P=MC. Healthy people are willing to pay dollar 1500 per year for health insurance Unhealthy people are willing to pay dollar 5000 per year for health insurance. Will an insurance market exist? Explain Assume 20 percentage of the population is unhealthy. If everyone buys insurance, what will insurance companies charge for a policy? Show your work. Now assume people can choose whether to buy insurance or not. Who will buy insurance now? As a result, what will happen to the price of insurance in equilibrium? Show your work. How could government lower the price of health insurance? Evaluate the following possibilities. Impose a mandate that makes everyone buy health insurance. Provide healthcare subsidies Impose price ceiling of dollar 1200

Explanation / Answer

a. yes, here also the insurance market exist, but many of the people who are healthy only takes insurance.

b. it is the potential market to the insurance company, they can make the 20% people as insurers.

c. the people who are healthy they only buy insurance with low premiums

d. government should provide health care subsidies.

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