This is for healthcare economics. Here is the data to be used:

Small changes make the original equilibrium impossible.

The same assumption:

a particular type of illness costs about $50,000 to treat.

an insurer considers offering a policy covering only the treatment of that illness.

Type Share Risk of Illness Willingness to Pay (WTP) Expected Cost Calculation

Well 90% 1% $750 $500 $500 = 1% x $50,000

ill 5% 10% $7,500 $5,000 $5,000 = 10% x $50,000

Now, what should the insurer charge to break even

$950 = 90 percent $500 + 10 percent $5,000

For the well, $950 > WTP = $750.

For the ill, $950 < WTP = $7,500.

The healthy will drop out of the risk pool.

Only the 10% relatively unhealthy can get insurance and they have to pay very high premium.

Small changes make the original equilibrium impossible.

Type Share Risk of Illness Willingness to Pay (WTP) Expected Cost Calculation

Well 95% 1% $600 $500 $500 = 1% x $50,000

ill 5% 10% $6,000 $5,000 $5,000 = 10% x $50,000

Assuming that the insurer can NOT distinguish between the two types of consumers, and can offer only one policy (the same policy to everyone). However, a recent technology advancement has lowered the actual cost of the treatment from $50,000 to $45,000.

1. How does this change the market outcome if we assume that not everyone will buy this policy (only ill would buy the policy at a $750 premium)?
2. What if the cost is now further lowered to $30,000?