1. Suppose the equilibrium price for an average hospital stay inthe absence of insurance is $10,000. At that price, 1000 people arehospitalized each year. Now suppose an insurer offers a policy tolower the out of pocket price of a stay to $100, and at that price,1200 people are hospitalized.
a) How much TOTAL premium revenue must be collected to financethis arrangement?
b) How much premium revenue per hospitalized person must becollected? Would the average person be willing to pay this premiumif they were risk averse?
c) Now suppose there are 120,000 people near this hospital, allof whom think they have an equal chance (1%) of being hospitalized.What must the per person premium be now?
