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A community has 50 low-risk residents, 50 medium-risk residents, and 50 high-risk residents. - A low-risk individual has an average annual medical expense of $600
A community has 50 low-risk residents, 50 medium-risk residents, and 50 high-risk residents. - A low-risk individual has an average annual medical expense of $600 and is willing to pay $800 for medical insurance that reimburses 100% of medical expenses. - A medium-risk individual has an annual medical spend of $900 and is willing to pay $1,200 for medical insurance that reimburses 100% of medical expenses. - A high-risk individual has an average annual medical expense of $1,200 and is willing to pay $1,600 for medical insurance that reimburses 100% of medical expenses. (Because they are risk-averse, they are willing to pay more than the average medical expense.) Assume that individuals will purchase medical insurance if the price matches their willingness-to-pay amount. The insurance firm (a monopolist in this town) is aware of this, but cannot determine who is high-risk, medium-risk, and low-risk. In addition to the reimbursement of medical expenses, there is an administrative cost (to the insurance company) of $50 per insured person per year. a. If the insurance company must choose only one price that applies to everyone, what price should it establish in order to maximize its profit? In this situation, how much is the social surplus (consumers' expected surplus + insurance company's expected profit) per year? b. The town council now passes a law that contains an individual mandate requiring everyone (all 150 individuals) to get medical insurance for $1,000 per year. Who will be opposed to this law among high-risk, medium-risk, and low-risk individuals and insurance companies? In this situation, how much will the social surplus (consumers' expected surplus + insurance company's expected profit) be per year? c. Using the previous model, give reasons in favor of the individual mandate, which requires everyone to get medical insurance
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