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Unformatted text preview: Econ 131 - Spring 2010 Professor: Camille Landais GSIs: Francois Gerard, Mark Borgschulte Problem Set 1 Due Wednesday April 14 in class. Late problem sets will not be accepted. For full credit, staple all pages of the problem set. 1) Short Answers (5 points) Show your work to receive partial credit. Please be succinct (less than 3 sentences). a) It is socially optimal to fully insure individuals against risks. True/False/Uncertain? False. While full insurance is socially optimal in many cases, moral hazard may mean that it is not possible to provide. b) The government observes that health insurance companies charge much higher premiums to those with a gene that predisposes them to cancer. Politicians who view this as unfair propose a bill that would outlaw this form of discrimination. Discuss the consequences of such a proposal for the insurance market and social welfare. If insurance companies cannot price discriminate, they will be facing higher average costs and will thus charge higher premiums. If the healthy individuals are very risk adverse they may keep buying this insurance (still efficient, full coverage for all) and we will observe redistribution from healthy to sick individuals. But if this pooling equilibria is not enforced (by government for example), insurance companies will start offering different contracts in such a way that individuals with different characteristics sort themselves. They will offer a cheaper partial coverage insurance that healthy people will buy and a full coverage (more expensive but actuarially fair) insurance for the sick. c) Large estimates of the elasticity of injury durations with respect to the workers compensation benefit rate directly imply that the moral hazard cost of this program is high and the optimal benefit rate for the program is low. True, False, or Uncertain? False. Large elasticities may be due to income effects (people would like to take more time off to heal if they had the money). In this case, benefit rate should not be low....
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