Using Exercise 16.20, sketch the effects in parts (a) and (b) on a single supply-and-demand diagram. What prediction would you make about how the improved information alters the equilibrium quantity and price?
Imagine that 50-year-old men can be divided into two groups: those who have a family history of a certain illness and those who do not. For the purposes of this example, say that 20 percent of a group of 1,000 men have a family history of the illness, and these men have a 1-in-50 chance of dying in the next year, while the other 80 percent of men have a 1-in-200 chance of dying in the next year. The insurance company is selling a policy that will pay $100,000 to the estate of anyone who dies in the next year.
- If the insurance company were selling life insurance separately to each group, what would be the actuarially fair premium for each group?
- If the insurance company were offering life insurance to the entire group, but could not find out about family health histories, what would be the actuarially fair premium for the group as a whole?
- What will happen to the insurance company if it tries to charge the actuarially fair premium to the group as a whole rather than to each group separately?