Figure 9.6
-Figure 9.6 represents the market for health insurance. Suppose there are two types of consumers, low-cost consumers with $2,000 average medical expenses per year, and high-cost customers with $4,000 average medical expenses per year. The insurance companies estimate that 40% of its customers are high-cost type. If the insurance companies set the price equal to their average cost per customer, what type of customers will dominate the market?

Question

Quizplus · Accepted Answer

Setting the price equal to the average cost per customer will drive away low-cost customers, as they will be paying the same price as high-cost customers despite having lower medical expenses. This will result in a higher proportion of high-cost customers dominating the market. Therefore, high-cost customers will dominate the market.

Figure 9.6 -Figure 9.6 Represents the Market for Health Insurance. Suppose There