E3 Consider the market for health insurance in which the average healthcare cost required for customers per year is distributed uniformly onthe interval [5000,49000]. In other words C~U[5000,49000]. Eachsingle customer knows his/her exact health care cost per year.Insurance companies, however, know the distribution of theircustomers health status but not the exact health status of a specificcustomer.1--C toAssume that a specific insurance package paying C is worth Cthe customer and C C to the insurance company.2a) Determine the price range for a 20,000 dollar insurance packagewhich leads to a Pareto optimal exchange under completeinformation.b) Determine the price under incomplete information, when customersknow C and insurance companies do not.c) Is the price biased? If so, is it biased upward or downward?d) What is the main economic implication of the offered price underincomplete information in the health insurance market?

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Consider the market for health insurance in which the average health care cost required for customers per year is distributed uniformly on the interval [5000,49000]. In other words C~U[5000,49000]. Each single customer knows his/her exact health care cost per year. Insurance companies, however, know the distribution of their customers health status but not the exact health status of a specific customer. 4 Assume that a specific insurance package paying C is worth C-C to the customer and C to the insurance company. c 2 a) Determine the price range for a 20,000 dollar insurance package which leads to a Pareto optimal exchange under complete information. b) Determine the price under incomplete information, when customers know C and insurance companies do not. c) Is the price biased? If so, is it biased upward or downward? d) What is the main economic implication of the offered price under incomplete information in the health insurance market?

Consider the market for health insurance in which the average health care cost required for customers per year is distributed uniformly on the interval [5000,49000]. In other words C~U[5000,49000]. Each single customer knows his/her exact health care cost per year. Insurance companies, however, know the distribution of their customers health status but not the exact health status of a specific customer. 4 Assume that a specific insurance package paying C is worth C-C to the customer and C to the insurance company. c 2 a) Determine the price range for a 20,000 dollar insurance package which leads to a Pareto optimal exchange under complete information. b) Determine the price under incomplete information, when customers know C and insurance companies do not. c) Is the price biased? If so, is it biased upward or downward? d) What is the main economic implication of the offered price under incomplete information in the health insurance market?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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