Reference no: EM13184487
Suppose you own an insurance company. Further suppose that this market is composed of only 3 people. Further still, supposed that this insurance is full coverage and medical expenses are always $1000. It would be logical to also assume conditions of asymmetric information. Specifically, assume the insurance company only knows the average probability of someone getting sick for the market as a whole. Each individual, however, does know his or her own probabilities. The relevant probabilities are as follows:
-Person 1: 70 % chance of getting sick
-Person 2: 60% chance of getting sick
-Person 3: 20% chance of getting sick
-Market: 50% chance of getting sick
Given the information, please answer the following questions,
a) Why might it be rational for an individual not to buy health insurance? Make sure to mention expected cost
b) How might an adverse selection spiral develop in this market. Make sure to include calculations.
c) How might the "individual mandate" associate with the PPACA affect "death spirals" from adverse selection? How would this affect premiums?
d) Will the individual mandate alleviate the problem of moral hazard?
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How might an adverse selection spiral develop in the market
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