Mary is an 18-year-old student, who recently bought a used car Mary is looking to buy car insurance Insurance companies compete for her businessIs there an adverse selection problems in a transaction between Mary and an insurance company? Why or why not?Adverse selectionOA arises because Mary will drive in a careless manner as soon as she has auto insuranceOB. does not arise because auto-insurance companies know that 1 year-old girls are better risks than 10-year-old boysOC. is eliminated by auto-insurance companies insuring as many young drivers as possibleOD. does not arise because insurance companiOE arises because Mary knows if she is a safe or a risky overrecklessinsurance company does not know this

When one party has more information than the other, there is always asymmetric information, which…

Mary is an 18-year-old student who recently bought a used car Mary is looking to buy car insurance Insurance companies compete for her business is there an adverse selection problems in a transaction between Mary and an insurance company? Why or why not? Adverse selection OA arises because Mary will drive in a careless amer OB does not arise because auto-insurance companies know that 10-year-old girls are better risks than 10-year-old boys rance companies au because insurance companies assu OD. des impery

Mary is an 18-year-old student who recently bought a used car Mary is looking to buy car insurance Insurance companies compete for her business is there an adverse selection problems in a transaction between Mary and an insurance company? Why or why not? Adverse selection OA arises because Mary will drive in a careless amer OB does not arise because auto-insurance companies know that 10-year-old girls are better risks than 10-year-old boys rance companies au because insurance companies assu OD. des impery

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter16: Information, Risk, And Insurance

Section: Chapter Questions

Problem 1SCQ: For each of the following purchases, say whether you would expect the dogma of imperfect information...

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20-1 Your product fail about 2% of the time, on average. Some customers purchase the extended warranty you offer in which you will replace the product if it fails. Would you want to price warranty at 2% of the product price? Discuss both moral hazard and adverse selection issues.
Imagine a market for used computers. There are two types of computers: good and bad. Also imagine that there are 50% of each on the market. Buyers can imagine paying 5,000 for a good computer and 1,000 for a bad computer Sellers want at least 4000 for a good computer and 1500 for a bad computer Assume that the buyer thinks that there is a 50% probability that the computer is of poor quality. What is the expected value and price of a computer that the buyer most wants to pay?
Many decision problems have the following simplestructure. A decision maker has two possible decisions, 1 and 2. If decision 1 is made, a sure cost of c isincurred. If decision 2 is made, there are two possibleoutcomes, with costs c1 and c2 and probabilities p and1 2 p. We assume that c1 , c , c2. The idea is thatdecision 1, the riskless decision, has a moderate cost,whereas decision 2, the risky decision, has a low costc1 or a high cost c2.a. Calculate the expected cost from the riskydecision.b. List as many scenarios as you can think of thathave this structure. (Here’s an example to get youstarted. Think of insurance, where you pay a surepremium to avoid a large possible loss.) For eachof these scenarios, indicate whether you wouldbase your decision on EMV or on expected utility
What is the problem of moral hazard?
What is an actuarially fair insurance policy?
For each of the following purchases, say whether you would expect the dogma of imperfect information to be relatively high or relatively low: Buying apples at a roadside stand Buying dinner at the neighborhood restaurant around the comer Buying a used laptop computer at a garage sale Ordering flowers over the internet for your friend in a different city
How can deductibles, copayments, and coinsurance reduce moral hazard?
1. A dealer decides to sell a rare book by means of an English auction with a reservation price of 54. There are two bidders. The dealer believes that there are only three possible values, 90, 54, and 45, that each bidder’s willingness to pay might take. Each bidder has a probability of 1/3 of having each of these willingnesses to pay, and the probabilities for each of the two bidders are independent of the other’s valuation. Assuming that the two bidders bid rationally and do not collude, the dealer’s expected revenue is approximately ______. 2. A seller knows that there are two bidders for the object he is selling. He believes that with probability 1/2, one has a buyer value of 5 and the other has a buyer value of 10 and with probability 1/2, one has a buyer value of 8 and the other has a buyer value of 15. He knows that bidders will want to buy the object so long as they can get it for their buyer value or less. He sells it in an English auction with a reserve price which he must…
Adverse selection can occur when a. all persons involved in a transaction have full information one person has information not available to others
Insurance buyers have more information about whether they are high-risk or low-risk than the insurance company does. This creates an asymmetric information problem for the insurance company because buyers who are high-risk tend to want to buy more insurance, without letting the insurance company know about their higher risk. How might this problem impact an insurance company? F T O The company will not be impacted. O The insurance buyers, not the company, will be impacted. As high risk buyers submit claims, they will use up the company's funds for that year, and since the company did not adjust for these high risk claims, once that money is used up, remaining claimants won't receive any coverage. The company will be faced with heavy losses. The insurance company may decide not to sell insurance in this market at all or otherwise choose not to sell insurance to those they can identify as high risk. 106 # C 4 $ JUL 21 tv♫♬ % MacBook Pro Search or type URL + W D P N Ⓒ
An individual has 40,000 in income per year. The person will get sick with probability 0.1. If he does get sick, the medical bills will total 30,000. The following tables shows the utility derived from certain amounts of income: Income Utility40,000 20037,000 19535,000 19030,000 17020,000 14010,000 100Considering the probability of illness, what is the expected utility of income without insurance? Show your work.
20-2 A collogue tells you that he can get a business loan from the bank, but he rates seem very high for what our collogue considers a low risk loan. Give an adverse selection explanation for this, and offer advice to your friend on how to solve the problem. Give moral hazard explanation for this, and offer advice to your friend on how to solve the problem.