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Suppose that we have a population made up of two groups: old and young. All members of the group have an initial wealth of $60,000/year
Suppose that we have a population made up of two groups: old and young. All members of the group have an initial wealth of $60,000/year and utility function of wealth UCW) = F. Members of the older group have a 1/4 chance Qfsu'ering $15,000 in health care costs per year, while the younger group on average has a 1/15 chance Qfsu'ering $5,000 in health costs per year. (Round the nal answer in each part to the nearest whole). a. Find the expected loss for each group. (2 points) Find the maximum Willingness to pay for health insurance for each group. (6 points) The insurance company must offer insurance to all members of the population (i.e., they cannot deny coverage to anyone for any reason) and they must also charge the same price across the board. Suppose that there are 50 members in the old group and 50 members in the young group. What would be the price offered by the insurance company if it calculates the price based on the weighted average of the two expected losses you calculated in part (a)? (2 point) If insurance was optional, then which of the two groups would be willing to buy into this insurance market, and which will opt out? (1 point) Based on your answer to part (c), calculate the prots of the insurance company. Are the prots positive or negative, and why? (2 point)
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