Peter J Wilcoxen > PAI 300 Economics for Policy Analysis

Weekly 2: Adverse Selection in Health Insurance

Due Tuesday 1/30

Suppose a community consists of two types of individuals, H and L, who are potentially interested in health insurance. Type H individuals are at high risk of illness and have a 5% chance of being sick during the period covered by insurance. Type L individuals, in contrast, are at low risk of illness and only have a 1% chance of being sick. The two types also differ in how expensive they are to treat when they become ill: A type H person's care costs $1 million while a type L person's care costs only $100,000. There are 100 type H individuals and 900 type L for a total population of 1,000.

Please use the template distributed in Teams to construct a spreadsheet to analyze the situation. The spreadsheet has green cells for initial data, orange cells for key results, and cells with borders but no color for formulas. Please add appropriate formulas to calculate all the missing cells, and then fill in answers to the three questions at the bottom.

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Peter J Wilcoxen, The Maxwell School, Syracuse University
Revised 01/25/2024