Numerical Question Consider the Rothschild-Stiglitz Model. Assume asymmetric insurance and heterogenous risk types and that all consumers have this utility function: U(I) = 11/3 The frail types have a probability of becoming sick: PFRAIL = 0.15, and the robust types have a probability of becoming sick: PROBUST = 0.05. All individuals start with income of $500. If an individual becomes sick, they lose $400, leaving them with $100. The insurance company decides to offer 2 contracts (A & B) and the consumer can either stick with "no insurance" or decide to buy Contract A or Contract B. The premiums and payouts are as described below: No Insurance Contract A Premium (r) $0 $15 Contract B $18 Payout if sick (q) $0 $380 $400
Numerical Question Consider the Rothschild-Stiglitz Model. Assume asymmetric insurance and heterogenous risk types and that all consumers have this utility function: U(I) = 11/3 The frail types have a probability of becoming sick: PFRAIL = 0.15, and the robust types have a probability of becoming sick: PROBUST = 0.05. All individuals start with income of $500. If an individual becomes sick, they lose $400, leaving them with $100. The insurance company decides to offer 2 contracts (A & B) and the consumer can either stick with "no insurance" or decide to buy Contract A or Contract B. The premiums and payouts are as described below: No Insurance Contract A Premium (r) $0 $15 Contract B $18 Payout if sick (q) $0 $380 $400
Chapter12: Medicare
Section: Chapter Questions
Problem 4QAP
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Transcribed Image Text:Numerical Question
Consider the Rothschild-Stiglitz Model. Assume asymmetric insurance and heterogenous risk types and
that all consumers have this utility function: U(I) = 11/3
The frail types have a probability of becoming sick: PFRAIL = 0.15, and the robust types have a
probability of becoming sick: PROBUST = 0.05.
All individuals start with income of $500. If an individual becomes sick, they lose $400, leaving them with
$100.
The insurance company decides to offer 2 contracts (A & B) and the consumer can either stick with "no
insurance" or decide to buy Contract A or Contract B. The premiums and payouts are as described
below:
No Insurance
Contract A
Premium (r)
$0
$15
Contract B
$18
Payout if sick (q)
$0
$380
$400
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