5. Suppose that when Michael is healthy he does not demand any doctor's visits. When he is sick his demand function for physician visits is summarized by the demand curve Q = 10-PD/10 where Q is the quantity of visits and PD is the demand price of a visit. Assume that doctor's visits are the only type of medical care Michael uses, and this illness is the only risk facing him. Michaels probability of becoming sick is 8 =.5 a) How many visits will Michael consume when sick if he has no insurance and the price of a visit is $50? How much does he spend on medical care when sick? b) What is Michael's expected spending on physician visits when he has no insurance? c) Explain whether an insurance company will be able to make a profit by offering full insurance coverage for all physician visits and charging a premium of $125. d) How many visits will Michael consume when he has full insurance when sick, so that the demand price is zero? If the supply price of a visit remains at $50, what is the total cost to the insurer when Michael is sick? What is the actuarially fair premium for the insurance company to offer Michael?

5. Suppose that when Michael is healthy he does not demand any doctor's visits. When he is sick his demand function for physician visits is summarized by the demand curve Q = 10-PD/10 where Q is the quantity of visits and PD is the demand price of a visit. Assume that doctor's visits are the only type of medical care Michael uses, and this illness is the only risk facing him. Michaels probability of becoming sick is 8 =.5 a) How many visits will Michael consume when sick if he has no insurance and the price of a visit is $50? How much does he spend on medical care when sick? b) What is Michael's expected spending on physician visits when he has no insurance? c) Explain whether an insurance company will be able to make a profit by offering full insurance coverage for all physician visits and charging a premium of $125. d) How many visits will Michael consume when he has full insurance when sick, so that the demand price is zero? If the supply price of a visit remains at $50, what is the total cost to the insurer when Michael is sick? What is the actuarially fair premium for the insurance company to offer Michael?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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