Essentials of Economics (MindTap Course List)
7th Edition
ISBN: 9781285165950
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 19, Problem 5PA
Subpart (a):
To determine
Example of moral hazards and adverse selections
Subpart (b):
To determine
Examples of moral hazards and adverse selection.
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Answer in step by step with explanation.
Don't use Ai.
Use the figure below to answer the following question. Let I represent Income when healthy, let I represent income when ill. Let E [I] represent expected income for a given
probability (p) of falling ill.
Utility
у в
ULI
income
Is
есте
IM
The actuarially fair & partial contract is represented by Point
X
× OB
A
Y
Suppose that there is a 25% chance Riju is injured and earns $180,000, and a 75% chance she stays healthy and will earn $900,000. Suppose further that her utility function is
the following:
U = (Income) ³.
Riju's utility if she earns $180,000 is _ and her utility if she earns $900,000 is.
X
56.46; 169.38
56.46; 96.55
96.55; 56.46
40.00; 200.00
169.38; 56.46
Chapter 19 Solutions
Essentials of Economics (MindTap Course List)
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