Now assume that there are two types of individuals in the market, Frail and Robust. Both individuals have a healthy income of $100,000 and when the individuals become sick, income decreases to $10,000. A. Assuming that moral hazard is not being exhibited, in the I/Is space, show the endowment point, E, the zero-profit lines and a full insurance line. Explain how and why the zero-profit lines are different for frail and robust individuals. B. Continue to assume that moral hazard does not exist. On your graph, label the frail and robust equilibrium contracts. Explain why these two contracts are an equilibrium and how they align with the concept of adverse selection. C. Now as soon as the individuals receives insurance, they start to exhibit moral hazard. Show how the change in the probability of sickness from moral hazard alters the zero-profit lines in a new Ih/Is graph. Label the new equilibrium contracts and explain whether or not consumers are better or worse off as a result of moral hazard.

Now assume that there are two types of individuals in the market, Frail and Robust. Both individuals have a healthy income of $100,000 and when the individuals become sick, income decreases to $10,000. A. Assuming that moral hazard is not being exhibited, in the I/Is space, show the endowment point, E, the zero-profit lines and a full insurance line. Explain how and why the zero-profit lines are different for frail and robust individuals. B. Continue to assume that moral hazard does not exist. On your graph, label the frail and robust equilibrium contracts. Explain why these two contracts are an equilibrium and how they align with the concept of adverse selection. C. Now as soon as the individuals receives insurance, they start to exhibit moral hazard. Show how the change in the probability of sickness from moral hazard alters the zero-profit lines in a new Ih/Is graph. Label the new equilibrium contracts and explain whether or not consumers are better or worse off as a result of moral hazard.

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter8: Market Failure

Section: Chapter Questions

Problem 10P

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