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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 $1,500 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.
1. 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?
2. Which consumers would purchase insurance at that price?
3. Are there wealth-creating transactions that are not consummated because of the information asymmetry?
If the United States gave Pakistan $1 billion for environmental clean-up of its water system, but a large portion of the money was diverted to be used for purchasing weapons,what would this be an example of in economic terms
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Why Does the Economy Fall to Pieces after a Financial Crisis - Prepare a powerpoint presentation talking about the document and also prepare an essay paper summarazing the article.
Suppose that rather than the declining demand assumed in Example 2.7, a decrease in the cost of copper production causes the supply curve to shift to the right by 40 percent. How will the price of copper change?
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