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Question: Suppose that, in certain economy, one firm is the only private …

Suppose that, in certain economy, one firm is the only private provider of health insurance. The firm
conducts rigorous medical examinations on potential clients to determine the health status with great
accuracy. In this case, an optimal pricing strategy for the firm would be:

a. To exclude potential clients with poor health condition (below certain optimal threshold level).

b. To exclude potential clients with poor health condition (below certain optimal threshold level).  

c. To offer a personalised policy to each potential client who walks into the company and undergoes
medical examination. The policies would be priced according to the following rule. Each client has
to pay the expected expenses associated with his or her health status, plus an X per cent profit
margin (X is the same for every potential client). In that case, maximum profitability will be
guaranteed and the separating equilibrium would imply no deadweight loss.

d. To offer personalised policies to some of the potential clients who walk into the company and
undergoes medical examination, following this rule. Each client is charged his or her willingness to
pay (assessed from questions on income, risk preferences and other factors) as long as it is
higher than the expected expenses associated with resident’s health status. In that case,
maximum profitability will be guaranteed and the separating equilibrium would imply no
deadweight loss.
IS (c) the answer?

Expert Answer

vlma007 answered this
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41,203 answers

The answer should be D in case we use perfect price discrimination where each consumer is charged
his/her reservation price or his willingness to pay. In that sense the profitability will be maximum because
there are no chances that the consumer, with a willingness to pay greater than the  expected expenses
associated with the health status, is not buying the insurance.

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