Reference no: EM132177073

There are 10 people in a country. Out of those people, 5 people (high risk) have a 20% chance of getting sick, and the other 5 (low risk) have only a 5% chance of getting sick. The costs of treatment when somebody gets sick is $10,000. An insurance firm is planning to offer a health insurance plan to people in this country. According to a survey done by the insurance firm, high risk people would pay at most $2000, and low risk people would pay at most $1000 for the plan. Assume the insurance firm cannot tell whether a person is high risk or low risk. 

a) What is the actuarially fair premium?

b) Who would buy insurance at this premium?

c) Would the insurance firm offer the health insurance plan for premium you get in a)? How much premium should the firm charge so that the firm will breakeven?

d) Suppose now the government provides a health care subsidy of $500 per person to the insurance firm, would all the people in the country get the health insurance? Why?

e) Would you expect the expected spending per person would change once everyone gets insured? Why?