ur 1. (a) Explain the difference between adverse selection and moral hazard.(b) How can adverse selection be dealt with? Would the involvement of the government in, say, a health-insurance market suffering from adverse selection problems rectify the situation, or would it create moreproblems?(b) Examine the table below. The insurance company does not know the probabilities of falling sick for eachindividual.Probability of falling sick0.20Insurance BuyerLost income if sick (Tk.)15,000AВ0.1525,00015,00030,00025,00015,000C0.10D0.10E0.05F0.15(i) If the company charged everybody a premium of Tk.3,000, who would stay and who would leave theinsurance market? Say why.(ii) If the company charged everybody a premium equal to the average of the actuarially fair premiums forall, who would stay and who would leave the insurance market? Say why.6-

Economics is a branch of social science that describes and analyzes the behaviours and decisions…

1. (a) Explain the difference between adverse selection and moral hazard. (b) How can adverse selection be dealt with? Would the involvement of the government in, say, a health- insurance market suffering from adverse selection problems rectify the situation, or would it create more problems?

1. (a) Explain the difference between adverse selection and moral hazard. (b) How can adverse selection be dealt with? Would the involvement of the government in, say, a health- insurance market suffering from adverse selection problems rectify the situation, or would it create more problems?

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter19: The Problem Of Adverse Selection

Section: Chapter Questions

Problem 7MC

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How might adverse selection make it difficult for an insurance market to operate?
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.
1. Suppose a person's utility is equal to U = Y and the initial income is $80,000. Medical expenses for a sick person amount to $40,000 and the probability of getting sick is 25%. Assume that the individual is required to pay the actuarially fair premium (r = p * M). a. b. What is the expected income when you are healthy? When you are sick? What is the expected utility if you buy insurance? What is the expected utility without insurance? C. What is the actuarially fair premium for the individual? d. Graph the individual's utility function. Clearly indicate the expected disposable income, utility with insurance, and expected utility without insurance. What is the dollar value of the individual's risk premium? Show this on the graph. How much is the individual willing to pay for insurance? e. f.
ease use utility of wealth function in the booK, 8-1 (see below). Certainty Utility B D 200 198 194 D' Total utility 170 of wealth C' Expected Utility A 140 10,000 15,000 19,000 20,000 Wealth FIGURE 8-1 Total Utility of Wealth and the Impact of Insurance Please explain the difference between the certainty utility line and the expected utility line b. Calculate your E(U), given an 80% change of being healthy and 20% of being sick, knowing that your income falls to $10,000 and your utility is 140 if you get sick. Calculate your E(W), given an 80% change of being healthy and 20% of being sick. d. Given that your Certainty Utility Function is U = 200Y-0.00154 and Y is your income, what is your Certainty Utility with insurance (if you are risk averse) What insurance premium will you pay to guarantee a utility of 197? Please provide a calculation.
For each of the following kinds of insurance, give anexample of behavior that reflects moral hazard andanother example of behavior that reflects adverseselection.a. health insuranceb. car insurancec. life insurance
Moral Hasard and Insurance The utility is U = W1/2 − 350S + 95S1/2 ; where W is wealth and S is care taken to avoid accidents. Probability of accident is 0.70 − S1/2 Wealth is ✩850,000 without accident and ✩300,000 with accident. Calculate S, EU and CE without insurance. Calculate S and EU with full insurance
1. A whole life insurance on (55) pays a benefit of 600 at the end of the year of death. You are given: (i) 0.015 0≤t≤20 μ55(t) 1 20
An employer needs to make a hiring decision and bring new employees on board. Some preliminary research indicated that ¼ of the pool could bring $50,000 value to the company, ¼ $60,000, ¼ $70,000, and ¼ $80,000. Assuming asymmetric information and adverse selection (you don’t know what value new employees could bring) what kind of job offer the company should consider in order to hire 4 new employees? Please explain.
10. Co-insurance reduces adverse selection. True or false, explain (*
for remain uninsured? S. Amanda has a utility of money function of u(w)-w4, Her initial wealth is w-$20,000 and she faces a .10 probability of a loss L $5,000; with probability 9 she suffers no loss. Calculate the amount of insurance Amanda will purchase if $1 of coverage costs $.10 per dollar of coverage. Would purchase any insurance if the cost per dollar of coverage was $.20.
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 Utility 40,000 200 |37,000 195 35,000 190 30,000 170 |20,000 140 10.000 100 A. Is this person risk neutral, risk loving or risk averse? Why? B. Considering the probability of illness, what is the expected income without insurance? Show your work.
2. Two individuals have the same income ($100,000), but different potential healthcare expenses. Person A's probability of having $80,000 in healthcare expenses is 0.5 percent. Person B's probability of having $800 in healthcare expenses is 50 percent. Assume your utility is U = VI where I is your income. Calculate each person's expected income and expected utility. Calculate each person's certainty equivalent. What does value of the certainty equivalent tell you about how much each person would be willing to insure against their loss?