A small town has 1,000 people, of whom 400 are sick. The annual expected medical claims of the healthy and sick are $500 and $9,000, respectively. If the insurance company cannot determine who is healthy and who is sick prior to the purchase of insurance, what annual premium will they set? Will this lead to adverse selection? Why or why not?

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The Answer of A small town has 1,000 people, of whom 400 are sick. The annual expected medical claims of the healthy and sick are $500 and $9,000, respectively. If the insurance company cannot determine who is healthy and who is sick prior to the purchase of insurance, what annual premium will they set? Will this lead to adverse selection? Why or why not?

A Small Town Has 1,000 People, of Whom 400 Are