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 Initech pays all health insurance costs and their insurance covers all possible health issues. The company Wayne Enterprises 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.

Required:
a. Which type of workers will likely work for Aurilia, Kent, and Snow?
b. Which type of workers will likely work for OCP?

Explanation:

The type of case is solved by the use of Adverse selection.

Adverse selection is a problem that occurs when market participants have asymmetric knowledge, information, and understanding.

Now, the unhealthy workers will preferably work for  Aurilia, Kent, and Snow. This is because, They have quite huge healthcare costs, and Aurillia, Kent, and Snow bear all healthcare costs, and their insurance covers all healthcare problems. Healthy people, on the other hand, find it less appealing.

However, Healthy employees are much more preferably to work with OCP and they allocate and give them higher wages to healthy people to compensate or reimburse them for their healthcare expenses.

Staff from Aurillia, Kent, and Snow, on the other hand, find it less appealing since they just pay a limited portion of the premium rate, which would not offset the high healthcare costs of unhealthy workers.

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