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4. There are fifty (50) low-risk people in a town and fifty (50) high-risk people. A low-risk person has an average of $1000 in
4. There are fifty (50) low-risk people in a town and fifty (50) high-risk people. A low-risk person has an average of $1000 in medical expenses each year and is willing to pay $1,200 for medical insurance (i.e. this person is risk averse). A high-risk person has an average of $2,000 in medical expenses per year and is willing to pay $2,400 for medical insurance. Insurance companies are unable to tell who is low risk and who is high-risk. a. Will an insurance company lose money if it offered to sell medical insurance at an annual premium of $1,600? Briefly (in a couple of sentences) explain your answer. [5 points] b. What happens if insurance companies offered medical insurance at an annual premium of $2,200? Briefly (in a couple of sentences) explain your answer. [5 points]
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