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5. Insurance companies often classify people into risk groups, and charge lower premiums to those with lower risks because________________.

a. If people are not separated into risk groups, then those with low-risk must pay for those with high risks.

b. If people are not separated into risk groups, then those with high-risk must pay those with low risk.

c. both a and b

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Raushan Raj
Raushan RajLv8
2 Nov 2020

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Related questions

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?

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.

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 equal 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?

4. If the low-risk consumers were willing to pay $1,500 for the insurance, how would your answers to questions 2 and 3 change?

1. Which of the following statements is correct for a firm that can price-discriminate?

a) It should adjust prices so that customers with price-inelastic demand pay higher prices than those with elastic

demand.

b) It should adjust prices so that customers with price-inelastic demand pay lower prices than those with elastic

demand.

c) It should adjust prices so that customers with price-elastic demand pay lower prices than those with inelastic

demand.

d) It should adjust prices so that customers with price-elastic demand pay higher prices than those with inelastic

demand.

2. Suppose a monopoly can separate its customers into two groups. If the monopoly practices price discrimination, it will

charge the lower price to the group with:

a) the fewer close substitutes.

b) the lower price elasticity of demand.

c) the higher price elasticity of demand.

d) The answer cannot be determined with the information given.

3. Many hotel chains offer discounts for senior citizens. This is an example of ________ that is ________ in the United

States.

a) single-price monopoly power; legal

b) price discrimination; legal

c) market power; illegal

d) price discrimination; illegal

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