Question

question 5 in reference to question 3

Question 3 Consider the market for health insurance where it costs the insurance company 54,000 to insure a healthy person and 58,000 to insure a sick person Suppose a healthy person's maximum willingness to pay for health insurance is $5,500 and a sick person's maximum willingness to pay is $10.000 Suppose the insurance company expects to receive 75% healthy customers and 25% sick customers. At what price will insurance in the market sell for? Be sure to include a dollar sign in front of your answer. Type: Fill In The Blank Points Awarded: 1/1 Your Answer(s) 55000 Question 4 True or false Healthy people will buy insurance at the market price calculated in question 2. Type: True or False Points Awarded: 1/1 Your Answer(s) Question 5 Refer to Question 2. What price will ultimately prevail in the market as a result of the death spiral? Type Multiple Choice Points Awarded: 0/1 Your Answer(s) $6,625

Answer 1

Death Spiral is the result of adverse selection in insurance policies in which lower risk policy holders choose to change policies or be uninsured. It results in costs that were supposedly covered by insurance being pushed back onto the insured.

In our case, a death spiral would imply that the entire 75% healthy population would roll back their insurance premium, and the entire burden would fall on the sick/insured population. Thus, the price that will ultimately prevail in case of death spiral is :

(100% of $8000) = $8000