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Suppose there are two types of people who need health insurance; high-risk and low-risk consumers. High-risk consumers have a relatively high probability of needing expensive medical care and on average incur $2,000 of medical expenses per year. The high-risk consumers would be willing to pay up to $2,500 for insurance that covers all their medical bills. Low-risk consumers would be willing to pay up to $1,400 for full-coverage insurance and on average would incur on average $1,200 in medical bills. Assume 1/3 of all consumers are high-risk and the remaining 2/3 of consumers are low-risk. Consumers know whether they are high-risk or low-risk. The insurance company knows 2/3 of all consumers are low-risk but cannot identify which consumers are low-risk.
If all consumers bought insurance, what price must the insurance company charge to break even in expectation? That is, what price must the insurance company charge so that the expected payments equals the premium?
Which consumers would purchase insurance at that price?
Are there wealth-creating transactions that are not consummated because of the information asymmetry?
If the low-risk consumers were willing to pay $1,500 for the insurance, how would your answers to questions 2 and 3 change?
Federal Reserve System: What are the main powers and responsibilities of the Federal Reserve System? What are its two mandates and some of its other goals?
The manufacturer of Brand A automobile tires claims that its tire can save 110 gallons of fuel over 55,000 miles of driving, as compared to a popular competitor (brand B). If gasoline costs $4.00 per gallon, how much per mile driven does this tire sa..
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Illustrate what variables other than cost appear to have the biggest impact on the demand products
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Assume an open, mixed economy (C+I+G+X=real GDP) and an MPS of .2 What is the multiplier? if the government spending (G) increases by $50B, how much will the real GDP increase? If taxes also increase by $50B, consumption (C) will fall by how much?
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Suppose the government cuts income taxes. Show the IS/LM model the impact of the tax cut under two assumptions. (1) Government keeps interest rates constant through an accommodating monetary policy. (2) The money stock remains unchanged. Explain the ..
Assume that in addition to policy action described above, Fed decides to sell a massive amount of Treasury bonds from open market. Elucidate in detail effect of this policy action on size of money supply.
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