For the population as a whole, average healthcare spending is $1,190 per year. Those with a family history of cancer (5 percent of the population) spend $20,000 on average, and those with no family history (95 percent of the population) spend $200. An insurer is offering first-dollar coverage for $1,200.

a. You are not risk averse and have no family history of cancer. Do you buy coverage?

b. You are not risk averse and have a family history of cancer. Do you buy coverage?

c. If you were risk averse, how would your answers to the last two questions change?

d. What could an insurer do to prevent this sort of adverse selection?

e. What would be wrong with having everyone undergo a physical exam to qualify for coverage?