Question

suppose there are only two types of people, healthy people who never get sick and unhealthy people who have very high health care costs. suppose that each person can work for one of only two firms. the firm of duff beer pays all health insurance costs and their insurance covers all possible health issues. the company brawndo pays a small part of the health insurance costs and requires high copayments, but they also pay higher wages to compensate healthy people for their health costs but not unhealthy people. also, assume that the two firms produce the exact same product and the types of work employees perform at the firms are identical. which type of workers will likely work for duff beer? healthy workers only unhealthy workers only both types which type of workers will likely work for brawndo? unhealthy workers only healthy workers only both types we see the sorting this way because of moral hazard. adverse selection.

Answer 1

Unhealthy workers would likely work for Duff Beer due to full health coverage, while healthy workers might choose Brawndo for higher wages, showing the effects of moral hazard and adverse selection. The Affordable Care Act and employer-based insurance in the U.S. market are ways to mitigate these issues.

Step-by-step explanation:

In the scenario described, unhealthy workers who face high healthcare costs would likely prefer to work for Duff Beer, as the firm covers all health insurance costs and provides insurance that covers all possible health issues. Healthy workers, who do not anticipate high healthcare expenses, might prefer to work for Brawndo if the higher wages compensate them sufficiently for the reduced health insurance benefits. This example illustrates problems of moral hazard and adverse selection in insurance markets. Adverse selection occurs when insurance buyers have more information about their risks than the insurance company, leading to a situation where only those with high risks find the insurance favorable.

One of the approaches to solving adverse selection in the U.S. health insurance market has been through employer-based insurance, which groups people with varying health risks, or through health exchanges under The Affordable Care Act. Government interventions, such as the Act's requirement for all Americans to purchase health insurance and preventing providers from denying individuals based on preexisting conditions, attempt to address the adverse selection and moral hazard problems in health care.