Question

The adverse selection problem exists where

	the frail trying to get policies meant for frail individuals
	the robust trying to get policies meant for robust individuals

	the frail trying to get policies meant for robust individuals
	healthy people living very careful lives being offered robust policies

all of the above

Using the R-S graph: Given the zero point line (fair insurance), in

which area will there be negative profits earned by insurance companies?

	the whole full insurance line
	the whole partial insurance area

	the whole more than full insurance area
	the whole more than fair insurance area

Using I_S - I_H space (R-S model), the equilibrium with symmetric information and

heterogeneous patients is found

	on the frail and robust zero profit lines where corresponding indifference curves are tangent
	at the intersection of the full insurance and zero profit line

	at the point where the frail zero profit line meets the robust zero profit line
	all of the above

Answer 1

The adverse selection problem exists where the frail trying to get policies meant for robust individuals. Frail are the individual who are suffering from any chronic disease thus are required to pay a greater amount of insurance premium to get health coverage as the risk associated with them is much higher. Hence when they are trying to get into the insurance pool of robust individual thus they are cheating the insurance firm. They are taking health benefits by paying the lesser premium designed for healthy individuals when thus should having paying higher premium.