Buyers' willingness to pay (WTP) for auto insurance plans, and sellers’ willingness to accept (WTA) when selling plans to each type of buyer, are outlined below. High-Risk 10,000 Low-Risk WTP ($) WTA ($) 6,000 8,000 2,000 (a) In a world with perfect information, would the market for insurance plans clear? If not, why? If yes, what are some prices that would allow both markets to clear? The prices in each market are allowed to differ. (b) Assume now that there is asymmetric information and that insurance companies do not know how risky an individual buver is In the face of this uncertainty they determine that the

Buyers' willingness to pay (WTP) for auto insurance plans, and sellers’ willingness to accept (WTA) when selling plans to each type of buyer, are outlined below. High-Risk 10,000 Low-Risk WTP ($) WTA ($) 6,000 8,000 2,000 (a) In a world with perfect information, would the market for insurance plans clear? If not, why? If yes, what are some prices that would allow both markets to clear? The prices in each market are allowed to differ. (b) Assume now that there is asymmetric information and that insurance companies do not know how risky an individual buver is In the face of this uncertainty they determine that the

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Because of the moral hazard problem, a-the government has increased incentive to regulate insurance markets. b-low-risk individuals do not choose insurance. c-the costs of providing insurance decreases. d-full insurance may no longer be efficient.
25. Which of the following is the best example of a moral hazard problem? Question 25 options: a) A borrower uses the proceeds of a business loan to gamble at a Las Vegas casino. b) A borrower decides to borrow at a fixed rather than a variable interest rate. c) A bank has difficulty in distinguishing between good and bad credit risks. d) A borrower makes all of her payments despite a downturn in her business.
Alana wishes to obtain auto insurance. She wants 100/300/100 liability coverage, $250 deductible collision and full coverage comprehensive. She lives in territory 2 and has been assigned to driver class 2 with a rating factor of 1.25. Based on Table 19-6 and Table 19-7, what would be her total premium, if her three-year-old car were in model class L? (Round your answer to the nearest cent.) a. $355.00 b. $365.00 c. $456.25 d. $465.38
Suppose the equilibrium price for good quality used cars is $20,000. And the equilibrium price for poor quality used cars is $10,000. Assume a potential used car buyer has imperfect information as to the condition of any given used car. Assume this potential buyer believes the probability a given used car is good quality is .60 and the probability a given used car is low quality is .40. Assume the seller has perfect information on all cars in inventory. How does the informational imbalance result in market failure? a. Only good quality cars are sold, hence the market under-provides used cars. b. Both poor and good quality cars are sold, hence the market over-provides used cars. c. Only poor quality cars are sold, hence the market under-provides used cars. d. Both poor and good quality cars are sold, hence the market efficiently provides used cars.
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The Australian health sector suffers from informational asymmetry problems pertaining to ‘moral hazard’ and ‘adverse selection’. Please provide a reason for why you either agree or disagree with the statement.
___ occurs when insurance companies structure plans that provide an incentive for healthier consumers to enroll while discouraging enrollment of higher-risk individuals a. Guaranteed renewability b. Cherry-picking c. Moral Hazard d. Asymmetric Information e. Adverse Selection