What will happen to theinsurance market after this test is developed? Who will benefitfrom this development?Health EconomicsA. Insurance and Adverse SelectionAssume that there are two types of people: Type As who are morelikely to get a disease, and Type Bs who are less likely to get adisease. 1. Assume first that people do not know what type theyare. Will people purchase insurance? Why? 2. Now assume that peopleknow what type they are but insurance companies are unable to findout this information. Will both types be likely to purchase equalamounts of insurance? Is there an adverse selection problem? WillType As buy insurance? Type Bs? 3. Now assume that insurancecompanies can determine an individual’s type by administering aninexpensive test. Will there be an adverse selection problem? Whowill benefit from this change? 4. Now assume a widely availableinexpensive test is developed that determines with certaintywhether an individual will get sick or not. What will happen to theinsurance market after this test is developed? Who will benefitfrom this development?
