Calculate the net welfare gain/loss for an insurance policy assuming the following amounts.

• Risk premium => $100
 
• Expected benefits => $840
 
• Moral hazard losses => $80
 
• Insurance premium => $924

• 2) This question is about "adverse selection."
  1. Describe adverse selection as it relates to the economics of health insurance.
  2. We said in class (and in the slides) that when we have two types of people ("healthy" and "sickly") and the insurance company does not know their type, we can get a "separating equilibrium." Describe why the separating equilibrium makes the "healthy" type worse off.