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. Initially the insurance companies estimate that 40% of its customers are high-cost type. Compared to the outcome with pessimistic expectations, how many more customers buy health insurance?

Question

Quizplus · Accepted Answer

Given the lack of specific details about Figure 9.6 and the insurance pricing strategy, a general explanation based on adverse selection in insurance markets can be provided. When insurance companies have pessimistic expectations (assuming a higher proportion of high-cost customers), they set higher premiums to cover the anticipated costs. This discourages low-cost consumers from buying insurance, leading to a market with predominantly high-cost consumers. If the insurance companies adjust their expectations (assuming a lower proportion of high-cost customers or better assessing the risk), they might offer lower premiums, attracting more low-cost consumers into the market. The specific number (1,500 more customers) suggests a scenario where adjusting expectations or improving risk assessment significantly increases the pool of insured, likely by making insurance more attractive to low-cost consumers who previously opted out due to high premiums.

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