Excercises - Adverse Selection Exercise - Edubirdie

University:
Massachusetts Institute of Technology
Course:
15.501/516 | Accounting
Academic year:

2023
Views:

336

Pages:

1
Author:

aunesstuprating

Consider the market for health insurance. Suppose that the market is comprised of 4 groups of people of differing risk categories. There are a large and equal number of people in each group, but insurers cannot tell which group a person belongs to (i.e. this is a situation of asymmetric information). Each group faces a risk of requiring medical treatment of value $10,000. Suppose that the willingness to pay of people in each group is as follows: Risk WTP Actuarially fair premium Risk Premium 20 2,500 40 5,200 60 6,800 80 8,500 a) Complete the table of actuarially fair insurance premiums that could be charged to each group separately by an insurance company large enough to diversify the risks. How do these compare to the willingness to pay? b) Suppose now that the risk category is private information. What is the average riskiness of a person seeking insurance? What premium would an insurance company have to charge to break even? c) Will all the agents participate at this price? If not what would be the composition of risks facing the insurer? Would the premium found above be sufficient to cover the risks taken by the insurer? d) Continue with this logic. What will be the price of insurance in the equilibrium and which groups will participate? e) Is this an efficient outcome?

Related Documents

Excercises - Adverse Selection Exercise

Excercises - Adverse Selection Exercise - Page 1

of 1

Recommended Documents

The Balance Sheet and the Recording of Transactions

The Balance Sheet and the Recording of Transactions

Massachusetts Institute of Technology 15.501/516 | Accounting

Lecture Note

The Accounting Process

The Accounting Process

Massachusetts Institute of Technology 15.501/516 | Accounting

Lecture Note

Introduction to Financial and Managerial Accountin Problem Set 2 - Answers

Introduction to Financial and Managerial Accountin Problem Set 2 - Answers

Massachusetts Institute of Technology 15.501/516 | Accounting

Answer Key

Financial Statements - the Annual Report

Financial Statements - the Annual Report

Massachusetts Institute of Technology 15.501/516 | Accounting

Lecture Note

The Classified Balance Sheet

The Classified Balance Sheet

Massachusetts Institute of Technology 15.501/516 | Accounting

Lecture Note

Tabular analysis of the effects of various

Tabular analysis of the effects of various

Massachusetts Institute of Technology 15.501/516 | Accounting

Lecture Note

Mapping the Telecom Value Chain - A Roadmap for Communications Networks

Mapping the Telecom Value Chain - A Roadmap for Communications Networks

Massachusetts Institute of Technology 15.501/516 | Accounting

Lecture Note

Constructive Conflict, Uncertainty and Real Options

Constructive Conflict, Uncertainty and Real Options

Massachusetts Institute of Technology 15.501/516 | Accounting

Lecture Note

Strategic Management and Consulting Proseminar Strategic Questions Lufthansa

Strategic Management and Consulting Proseminar Strategic Questions Lufthansa

Massachusetts Institute of Technology 15.501/516 | Accounting

Answer Key

Advanced Corporate Risk Management MW Petroleum (B) Case Assignment

Advanced Corporate Risk Management MW Petroleum (B) Case Assignment

Massachusetts Institute of Technology 15.501/516 | Accounting

Lecture Note

Communication for Managers Active Listening Exercise

Communication for Managers Active Listening Exercise

Massachusetts Institute of Technology 15.501/516 | Accounting

Answer Key

Communication for Managers Craigstone Corporation Worksheet

Communication for Managers Craigstone Corporation Worksheet

Massachusetts Institute of Technology 15.501/516 | Accounting

Lecture Note

New Documents from this Course

Introduction to Financial and Managerial Accountin Problem Set 1

Introduction to Financial and Managerial Accountin Problem Set 1

Massachusetts Institute of Technology 15.501/516 | Accounting

Answer Key

Midterm 2 Review Notes

Midterm 2 Review Notes

Massachusetts Institute of Technology 15.501/516 | Accounting

Lecture Note

Marketable Securities (Deferred Taxes)

Marketable Securities (Deferred Taxes)

Massachusetts Institute of Technology 15.501/516 | Accounting

Lecture Note

Long-term Assets, Depreciation (Deferred Taxes)

Long-term Assets, Depreciation (Deferred Taxes)

Massachusetts Institute of Technology 15.501/516 | Accounting

Lecture Note