🏷️ LIMITED TIME OFFER: GET 20% OFF GRADE+ YEARLY SUBSCRIPTION →
Log in
Economics
6
answers
0
watching
238
views
2 Nov 2020

13. Which of the following is true about adverse selection and moral hazard?

a. Adverse selection is a consequence of asymmetric information; asymmetric information is a consequence of moral hazard.

b. Insurance companies can eliminate adverse selection by charging deductibles and co-insurance, but charging deductibles and co-insurance increases the risk of moral hazard.

c. Adverse selection affects only the market for automobile insurance; moral hazard affects only the markets for health and life insurance.

d. Adverse selection refers to what happens at the time of entering into a transaction; moral hazard refers to what happens after entering into a transaction. 

Booster class
Microeconomics
Skill
Understanding Insurance and Imperfect Information
Watch
6
answers
0
watching
238
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Unlock all answers

Get 1 free homework help answer.
Already have an account? Log in
Share
Already have an account? Log in
Share
Already have an account? Log in
Share
Already have an account? Log in
Share
Already have an account? Log in
Share
Raushan Raj
Raushan RajLv8
2 Nov 2020
Already have an account? Log in
Share

Related textbook solutions

Principles of Economics
2nd Edition, 2017
Openstax
ISBN: 9781947172364
Principles of Macroeconomics
2 Edition,
Openstax
ISBN: 9781947172388
Principles of Microeconomics
2 Edition,
Openstax
ISBN: 9781947172340

Related questions

Asymmetric information is a problem in many markets, such as the used car market, the insurance markets, and the credit markets. Choose one of these three markets, and using some of the concepts you learned from this module, discuss the questions below: What is the market response to asymmetric information? (Hint: Does Coca-Cola have an asymmetric information problem?). What is the market response to adverse selection? (Hint: When you purchased life insurance, did you have to take a physical exam?). What is the market response to moral hazard? (Hint: Remember last time you saw a doctor you had to pay a $30 deductible?). Do you think that education is a "market signal" that can help companies make better economic decisions when asymmetric information exists? What would be the market response if there was perfect information?

Project Introduction:

Research and analyze the effects of the following government policies on the market equilibrium.

1. Increases in the Minimum Wage

2. Restrictions on International Trade

3. Pollution Controls

4. Natural Monopolies and Anti-Trust Regulation

ES2550: Project Page 5

When analyzing these policies, include some discussion of the following points when appropriate:

A. What is the purpose of the policy?

B. Provide the rationale for the government policy. In this section, discuss how asymmetric information creates a need for the policy.

C. Note 1: The necessity of the policy should be related to the purpose.

D. Note 2: A discussion of asymmetric information should include defining how the information is unequal between consumers and producers as well as any adverse selection or moral hazard issues involved.

E. The welfare of consumers, producers, and society (the winners and losers) before and after the policy.

F. How does this policy affect the fairness of the distribution of costs and benefits?

G. Does government intervention improve the situation?

Note: Discuss whether government intervention affected the asymmetric information problem, adverse selection, or moral hazard previously discussed.

1) Insurance and social policy

You are making an app with a 5% chance of making a ton-load of money, and 95% chance of earning nothing. Your utility is the square root of income (Utility = Y1/2); you will have $10,000,0001/2 happiness if your app succeeds but 01/2 happiness if it fails.

a) (2 points) What is the expected value of your app? How much money can you expect to make? What is your utility at that income (if you know that your income will be the expected value of your app)?

Note that in EXCEL, the square root function is “=X^.5” for the number X

b) (1 point) What is your expected utility from your app? (Note: this is the weighted average of utility when the app succeeds and when it fails where the weight is the probability of success.)

c) (2 points) Why do people buy insurance? How can insurance companies profit? What happens to expected utility when people can buy insurance at a fair market price?

d) (2 points) What is moral hazard and what is adverse selection. How do these affect insurance markets? Give examples from the marketing of veterinary insurance. Would you expect markets with moral hazard and adverse selection to provide the optimal amount of veterinary insurance at an efficient price?

Weekly leaderboard

Home
Homework Help 3,900,000
Economics 400,000
Start filling in the gaps now
Log in