And what will be the mechanisms to improve the market

Assignment Help Econometrics
Reference no: EM13203516

Consider the market for health insurance. Suppose there are three people. Healthy Hal, Average Al, and Portly Pete. All three of these people will buy health insurance if it costs less than or equal to his actuarily fair insurance rate. Hal's true cost to insure is $5,000, Al's true cost to insure is $10,000, and Pete's true cost is $15,000.
a) Suppose the insurance company must offer a single policy to all customers, and it tries to be fair by averaging the costs of its three customers. What premium will it charge? Who will choose to buy insurance at that price?
b) Observing who has actually purchased a policy, the insurance company decides to adjust its premium to be the average cost of the observed customers in part (a). What premium will it charge?
Which customers will buy insurance at this price?
c) Once again, the insurance company observes who actually purchased insurance, and decides to adjust its premium to the average cost of its observed customers in part (b). What premium will charge? Which customers will buy insurance at this price? Is this market efficient? If not, suggest
some mechanism that might improve its efficiency.

For part (a), 1/3(5000+10000+15000)=10000? Al and Pete will buy
For part (b), 1/2(10000+15000)=125000; Pete will buy. The market is not efficient.
For part (c), 15000; Pete will buy
Am I right for the answers? And what will be the mechanisms to improve the market?

Reference no: EM13203516

Questions Cloud

What are the interest rates today on a 2-year bond : assume that the interest rate on a one year bond is 7 percent today and the interest rates expected on one year bonds in the future are 6 percents in 1-year, 5 percent in 2-year , and 4 percent in three years bond. according to the exceptions theo..
How is the measure used by investors : What does duration measure and how is the measure used by investors and how would you assess interest rate risk when investing in bonds?
Are the britannica on paper and the britannica on cd : Britannica gradually saw its market erode. By 1996, its estimated sales were around $325 million, or about one half of its 1990 sales. It decided to enter the digital encyclopedia market as well. First, it started offering on-line access at a rate..
Draw historgram for the number of rotten apples in a sample : suppose 5 apples in a barrel of 25 apples are known to be rotten. draw a historgram for the number of rotten apples in a sample of 2 apples.
And what will be the mechanisms to improve the market : Consider the market for health insurance. Suppose there are three people. Healthy Hal, Average Al, and Portly Pete. All three of these people will buy health insurance if it costs less than or equal to his actuarily fair insurance rate. Hal's true..
What are the pros and cons of each of these methods : Quadratic equations can be solved by graphing, using the quadratic formula, completing the square, and factoring. What are the pros and cons of each of these methods? When might each method be most appropriate? Which method do you prefer? Why?
In which direction is the x-coordinate moving : A point is moving on the graph of [5x^3 + 6y^3 = xy]. When the point is at P= [ (1/11), (1/11) ] its y-coordinate is increasing at a speed of 5 units per second. What is the speed of the x-coordinate at that time and in which direction is the x-co..
What are interest rate today on a 2-year bond : suppose that the interest rate on a one year bond is 7 percent today and the interest rates expected on one year bonds in the future are 6 percents in one year, 5 percent in 2-year , and 4 percent in three years bond. what are interest rate today ..
At what rate is the tip of her shadow moving away : At what rate is the tip of her shadow moving away from the light (ie. away from the top of the pole) when the girl is 31 ft away from the pole?

Reviews

Write a Review

 

Econometrics Questions & Answers

  Derive the optimal prices and the payoffs for each firm

Consider now that there are two qualities s1 and s2 with s2 > s1 provided by two different  firms 1 and 2. The timing is the following:  first  firms choose their qualities, second they compete in price.

  Define negative relationshp between gross domestic product

Compute the discount factor 1/(1+r)^t for r=1, 5, or 10 perent interest rates and t=30 and 50 years. remember that 1 percent is .01. based on your computation, is teh choice of discount factor important for deciding whether to do somehtinga bout..

  Determine the average cost function

If the firm can only produce one product and seeks to maximize weekly profit, write a condition that indicates when the firm should choose to produce Product 2 (where this condition is a function of the number of units sold per week).

  Calculate the present worth of the gifts

Autie Frannie wants to help pay for her twin nephews to attend a private school. She intends to send a cheque for $2,000 at the end of each of the next eight years to apply to the cost of schooling. a) If general price inflation, as well as tuiti..

  Determine producer surplus plus consumer surplus

Assume the following values for Figures 5.4a and 5.4b. Q1=20 bags. Q2=15 bags. Q3=27 bags. The market equilibrium price is $45 per bag. The price at a is $85 per bag. The price at c is $5 per bag. The price at f is $59 per bag. The price g is $31 ..

  What is the market value of the old equipment

If the newer equipment is purchased, it will have end-of-year O&M costs of $8,000 and a salvage value of $20,000 at that time. If the old equipment is retained, it will have to be supplemented in years 3, 4, and 5 by leasing a hi-def add-on unit c..

  Construct the relative frequency distribution of median

The cross-tabulation below classifies US states by median household income and by household Gini coefficient (a measure of income inequality). Use the cross-tabulation to answer the questions that follow.

  What is your expected pretax economic profit

You have worked as a real estate agent for 10 years and are earning about $100,000 per year with your current agency. You prepared the following information to use in evaluating the financial feasibility of starting your own agency.

  Calculate the irr on home using companys insulated concrete

A typical 2,000 sq. ft. home using standard concrete forms costs $120 per square foot to construct and uses $300 per month average to heat and cool. Calculate the IRR on a home using your company's insulated concrete forms on a typical 2,000 sq. f..

  What is the least squares estimate of ß1

Consider the simple linear regression model without an intercept, y = ß1x + u, with the assumption E(u|x)=0. Also assume that E(x)=0 Show that E(y)=0 and using this as well as E(x)=0 show that the covariance between x and y is given by E(xy) and that..

  At what level of output would the firm produce

Use the following information to calculate total revenue, marginal revenue, and marginal cost. Indicate the profit-maximizing level of output. If the price was $3 and fixed costs were $5, what would variable cost be? At what level of output would ..

  Give compliment or a substitute for water balloons

Suppose this the demand for water balloons fit the function D(P, Ps)=.2P^(-.5)Ps^(-.2) where P is the price of water balloons and Ps is the price of super soakers (an advanced squirt gun technology). Based upon this demand curve, are super soakers..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd