Consider a health insurance market. The market has many insurers so that each insurance company offers insurance at the fair insurance premium. Each consumer has utility function, U(X)= X and has an initial wealth of $100. Consumers have access to a magical) gym that reduces their probability of needing to go to the doctor from 90% to 10%. A gym membership costs $10. A trip to the doctor costs $75. Suppose insurance companies charge the fair insurance premium which assumes all consumers go to the gym. This fair insurance premium is $ and the insurance company makes a profit of $ v per consumer. Suppose insurance companies continue to charge the fair insurance premium that assumes all consumers go to the gym, but now charges a copay of $13 for a doctor's visit. The insurance company now makes a profit of $ per consumer. By implementing a copay, the insurance company the problem. -75 -60 -37.5 -7.5 0 1.3 7.5 37.5 60 75 resolves does not resolve adverse selection moral hazard