Question

Consider an insurance market with two kinds of individuals x is between {1/4, 3/4} where x is the individual’s expected health cost. We will also refer to x as an individual’s health type. There are equally many of each health type in the population. Insurance companies can offer health insurance, meaning they sell a contract where they promise to pay the health costs of the policy holder. The willingness to pay for insurance of a type x individual is W(x) = 1.5x. There is a total of 2,400 individuals in the market.

1) Suppose an individual’s health type x can also be observed by the insurance company and the insurance premium can be made conditional on x. What is the aggregate surplus in the health insurance market in this case?

Answer 1

Solution:

Given

x is between {1/4, 3/4}

W(x) = 1.5x

total of 2,400 individuals

1) aggregate surplus in the health insurance market in this case is:

if price=MC than price =120 and Q=4 office visits