Using a clear well labeled supply demand

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Unformatted text preview: subsidy to correct for the externality. What will be the equilibrium price that consumers pay for oysters? What will be the price received by oyster farmers? Show your work for credit. d) 6 points Illustrate this market before and after the policy intervention. Include the marginal private and social cost curves. Label equilibrium and efficient quantities. Label prices before and after the policy intervention. Shade in the area representing the deadweight loss that existed before the policy intervention. Page 11 Econ 325 CRN: 14794 Section A01 5) (18 points total) Suppose that there are two types of consumers. Type I (high risk) consumers are “heart attacks waiting to happen.” They have a 40% chance of incurring $10,000 in medical bills this year, and a 60% chance of incurring zero dollars in medical bills. Type II (low risk) consumers are “vegetarian health freaks.” They have a 10% chance of incurring $10,000 in medical bills this year, and a 90% chance of incurring zero dollars in medical bills. For purposes of doing this problem, you can assume that becoming insured will not change the behavior of any consumer (i.e. there is no moral hazard). a) (3 points) Assume for now that insurers have perfect information and know which type of consumer is which. Assuming an insurer needs to make profits of at least zero to offer an insurance contract, what is the minimum premium (amount paid by the consumer for annual insurance coverage) that an insurer is willing to accept for a full- coverage insurance plan sold to a Type I consumer (A full- coverage plan will pay all medical expenses incurred during the year)? To receive credit you must show your work. b) (2 points) What is the minimum amount that an insurer is willing to accept for a full- coverage insurance plan sold to a Type II consumer? To receive credit you must show your work. Page 12 Econ 325 CRN: 14794 Section A01 c) (3 points) Now suppose that Type I consumers are willing to pay up to $5000 for an annual insurance plan that will provide them with full coverage of medical expenses. Suppose Type II consumers are willing to pay up to...
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This document was uploaded on 09/17/2013.

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