Question

Suppose that the average annual malpractice cost is ​$50,000 for reckless doctors and ​$1,000 for careful doctors. If half of an insurance​ company's insured doctors are​ reckless, the company will earn zero economic profit if the price of insurance is ​$______nothing. ​If careful doctors are not willing to pay more than ​$5,000 for​ insurance, the price required for zero economic profit is ​$_______nothing.

Answer 1

1. $25,500

2. $50,000

Step-by-step explanation:

Company will earn zero economic profit if the price is $25,500

Insurance price = (50% x $50,000) + (50% x $ 1,000)

Insurance price = $25,000 + $500

Insurance price = $25,500

If the careful doctors are not willing to pay more than $5,000 for insurance then I am afraid reckless doctors will take the insurance with price of $50,000