Answer to Question #91742 in Microeconomics for neeraj

Question

The population has two kinds of health risks, high and low. Let the expected annual health care costs for the high risk be $5,000, and for the low risk, half that. If there are twice as many low risk as high risk individuals, and if the one insurer’s administrative load is 10%, what would the premium be if everyone is compelled to and able to buy health insurance?

Answer 1

High risk- $5000

Low risk - $2,500

Number of high risk individuals= y

Number of low risk individuals = 2y

High risk = 0.1X5000=500

Low risk= 0.1X2500= 250

250+500=750, 3y=750= y= 250

Premium = 250X750= $18750