ECON-2350 Lecture 5: Health insurance terms and risk aversion

209. Third-party payer systems for health-care services includepayments made by:
A) doctors.
B) patients.
C) hospitals.
D) insurance companies.

4. The price elasticity of demand is:
A) always positive.
B) always greater than 1.
C) usually equal to 1.
D) always negative.

46. Which of the following will lead to a decrease in totalrevenue?
A) price goes up and demand is perfectly inelastic
B) price goes up and demand is price inelastic
C) price declines and demand is price elastic
D) price increases and demand is price elastic

ABC plays football with the DEF Club in Mexico. If he does not suffer any injury by the end of the season, he will get a professional contract with GHI, which is worth 10,000 euros. If he is injured, he will get a contract as a fitness trainer in Ecuador, which is only worth 100 euros. The probability of suffering an injury is 10%. He is likely to get through the season unscathed with a 90%-probability.

1. Describe the gamble. How high is the expected value of this gamble?
2. How high is the expected utility, if his Bernoulli utility function of the VNM-utility function is u(x)=x^0.5?
3. Assuming he could buy insurance at the price P that would pay him 9,900 euro in the case of an accident, how high could the maximal value of P be for ABC to still afford the insurance?
4. Interpret the certainty equivalent. How high is the certainty equivalent c of the above gamble?
5. Calculate the coefficients of absolute risk aversion and interpret it. Is that a case of decreasing absolute risk aversion?

11. In health insurance markets asymmetric information between agents leads to adverse selection. T/F? With an example, explain how asymmetric information in the health insurance context does or does not lead to adverse selection.

17. A fair and partial insurance is more preferable as it maximizes risk-averse individual's utility and decreases overall healthcare costs in the society. T/F? Why?

18. In a pooling equilibrium, the insurance company offers two contracts that result in high-risk and low-risk types choose different contracts. T/F? Why?