Question

Info given-

•Two clear predictions flow from the model of expected utility maximization:

•1) The demand for insurance should be higher the larger the financial risk

•2) The demand for insurance should be lower the more elastic is the demand for the type of medical care being insured

-My question- does number 1 mean that the insurance should be more expensive than the financial risk?

Can you please explain 2 and what elastic means in this question? Thank you

Answer 1

Question no. 1 doesn't necessarily imply that insurance should be more expensive than financial risk. It rather means that in cases when financial risk is higher, the demand is price for insurance would be higher. In other words, one can say that price of insurance increases with increasing financial risk.

Question 2 means that as elasticity of demand for insurance increases, the demand for insurance decreases. Increase in elasticity means the increase in responsiveness of demand of insurance e.g for certain type of medical care which may induce a smaller expenditure, one may be slightly indifferent to get insured and as the price of insurance increases, quantity of insurance fluctuates more than in the case for certain other medical expenditure for which quantity of insurance may not fluctuate as much