QUESTION 3 Let's consider the health insurance market. Suppose there are two types of consumers: those with pre-existing conditions and those without. Those with pre-existing conditions make up 10% of consumers. All consumers are risk-averse with utility function, U(X) = \\ X . Those with pre-existing conditions require medical care 50% of the time. Those without require medical care 5% of the time. Assume each consumer has an initial wealth of $1000 and medical care costs $500. If the insurance companies are allowed to sell insurance at different prices to the two types of consumers and competition forces them to charge the fair insurance premium, consumers without pre-existing conditions v insurance at a price of $ v . Consumers with pre-existing conditions insurance at a price of $ Now suppose the government passes a law that bans discrimination on the basis of pre-existing conditions. In this case, the insurance companies can no longer offer insurance at two different prices (they can only charge a single price). In this case, in equilibrium, consumers without pre-existing conditions insurance at a price of $ v . Consumers with pre-existing conditions insurance at a price of $ o 10 25 47.50 100 125 Relative to before the law is passed, consumers without pre-existing conditions are v off. Consumers with pre-existing conditions are 227.50 250 off. buy don't buy are indifferent between buying and not buying better neither better nor worse worse