The effect of adverse selection on price of health insurance. An insurance firm would like to sell insurance to 3 groups of customers who differ by their risk of incurring medical expenses: high risk, medium risk and low risk. The expected annual "medical losses" for these groups of customers are $10, 000, $2, 000 and $500 respectively. The demand by these groups is given in the table below: a) Calculate a single pure premium price of an insurance policy if the insurance company cannot distinguish among the risk groups, and initially assumes that the high risk customers represent 10% of all enrollees. medium risk customers represent 30%, and low risk - are the remaining 60% of enrollees. b) How many policies will be sold at this price? How many high/medium/low risk customers will buy the policy? Illustrate with the demand graphs. c) Use the number of high/medium/low risk customers who'd purchase the insurance policy at the "starting price" found in (b) to recalculate the new price of the policy that reflect the actual composition of the insured How many policies will be sold at the re-calculated price to high/medium/low risk customers? Reflect on the graph