Suppose a market has three types of consumers, each making up a third of the market: low risk, medium risk, and high risk. Their annual health care expenditures will be as follows: $3,000 per year in healthcare will be needed for the low risk consumer, $3,300 per year for the medium risk consumer and $3,600 for the high risk consumer. Consumers are risk averse so they will prefer having insurance even if the premium costs the same as their expected expenses. The market has one insurance company. Required:
a. If the insurance company were to set its annual per-person healthcare premium equal to the average health care expenditures required, what premium would it set per person?
b. At the annual health care premium you identified, which consumers would buy the health insurance?
c. Accounting for the consumers who would buy the health insurance, would the insurance company break even, earn a profit or lose money?
d. Suppose the government imposes a $300 fine for not having insurance. What is the the lowest price that all consmers will buy insurance and insurance companies don' t lose money?