Suppose there are two types of people, high risk (H) and low risk (L) with utility function U(c) = c0.5 Each has income (=consumption) of $100. The high risk people are 10% of the population and have a 75% chance of getting cancer in which case their income would be zero. The low risk people are the remainder of the population and have a 25% chance of getting cancer and hence zero income. The private insurance industry is perfectly competitive. Insurers are afraid the government will take over the industry and decide to price in a different way. Mindful of the social consequences they will price so that the high risk is fully insured. What condition must be placed on the low-risk for this to be an equilibrium? What is the expected utility of the low-risk given the condition?
Suppose there are two types of people, high risk (H) and low risk (L) with utility function U(c) = c0.5 Each has income (=consumption) of $100. The high risk people are 10% of the population and have a 75% chance of getting cancer in which case their income would be zero. The low risk people are the remainder of the population and have a 25% chance of getting cancer and hence zero income. The private insurance industry is
Insurers are afraid the government will take over the industry and decide to price in a different way. Mindful of the social consequences they will price so that the high risk is fully insured. What condition must be placed on the low-risk for this to be an equilibrium? What is the expected utility of the low-risk given the condition?
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