There are 50% of healthy people and 50% of unhealthy people in a population. A healthy person gets sick with a probability of 25% and an unhealthy people gets sick with a probability of 50%, regardless of their actions or life choices. If a person gets sick, they lose $30,000 due to hospital bills and lost wages. The initial wealth for both types is $40,000. The utility for both types is u(w)=w1/2, where wstands for final wealth. There is an insurance company considering offering a full insurance plan.

Question 32: Consider the following statements:

1. The consumers in this economy are risk neutral.
2. Suppose the insurer can observe health status and is allowed by policymakers to set different premiums based on the client's health. There will still be an adverse selection problem leading to market failure.
3. Providing partial insurance, instead of full insurance, may attenuate the moral hazard problem in this economy.

LONG QUESTION 3: There are 50% of healthy people and 50%% of unhealthy people in a population. A healthy person gets sick with a probability of 25%% and an unhealthy people gets sick with a probability of 50%%, regardless of their actions or life choices. If a person gets sick, they lose $30,000 due to hospital bills and lost wages. The initial wealth for both types is $40,000. The utility for both types is w (wr) = why?, where w stands for final wealth. There is an insurance company considering offering a full insurance plan. Question 32: Consider the following statements: I. The consumers in this economy are risk neutral. Il. Suppose the insurer can observe health status and is allowed by policymakers to set different premiums based on the client's health. There will still be an adverse selection problem leading to market failure. Ill. Providing partial insurance, instead of full insurance, may attenuate the moral hazard problem in this economy. O Only I is comect. O Only Ill is correct. More than one statement is comoct. O Only ll is correct. No statement is comect. Question 33 1 pts Assume that the insurance company cannot observe individual health status, though they know the share of healthy people in the population. Which of the following premiums P are consistent with an equilibrium where the insurer achieves positive expected profits? 1. 9,000 II. 12,000 III. 16,000 O Only L. 0 Only III. O More than one of these values lead to positive profits for the insurer. O Only II. O None of these values leads to positive profits for the insurer