Exercise 13.9

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

a)      You are not risk averse and do not have a 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 two previous questions change?

d)     What could an insurer do to prevent this sort of adverse

Selection?

e)     What would be wrong with having everyone undergoa physical exam to quality for coverage?