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. If the insurance companies are pessimistic and set their price according to their pessimistic expectations

Question

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When insurance companies set prices based on pessimistic expectations, they anticipate higher average costs, likely closer to the $4,000 average of high-cost customers. This leads to higher premiums, which low-cost customers (with $2,000 average medical expenses) are less willing to pay, effectively driving them out of the market. Thus, the market will predominantly include only high-cost customers, as they are the ones for whom the insurance pricing aligns more closely with their expected medical expenses.

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