Bundle: Principles of Economics, Loose-leaf Version, 8th + LMS Integrated MindTap Economics, 2 terms (12 months) Printed Access Card
8th Edition
ISBN: 9781337607735
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 22, Problem 2QR
To determine
The problem of adverse selection.
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Briefly explain what is “signaling” (from an economist’s view) and how it may reduce adverse selection.
What is moral hazard?
Which of the follow describes the basic problem of Adverse Selection? O It occurs "before the transaction," and is due to a change in behavior of the agent. O It occurs "after the transaction." and is due to inherent unchanging characteristics of the agent. It occurs "after the transaction," and is due to a change in behavior of the agent. It occurs "before the transaction," and is due to inherent unchanging characteristics of the agent.
Chapter 22 Solutions
Bundle: Principles of Economics, Loose-leaf Version, 8th + LMS Integrated MindTap Economics, 2 terms (12 months) Printed Access Card
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- Consider the model of the market for lemons from Chapter 22. Suppose that there are two types of used cars — good ones and lemons — and that sellers know which type of car they have. Buyers do not know which type of car a seller has. The fraction of used cars of each type is 21 and buyers know this. Let’s suppose that a seller who has a good car values it at $10,000 and a seller with a lemon values the lemon at $5,000. A seller is willing to sell his car for any price greater than or equal to his value for the car; the seller is not willing to sell the car at a price below the value of the car. Buyers’ values for good cars and lemons are $14,000 and $8,000, respectively. As in Chapter 22 we will assume that buyers are risk-neutral; that is, they are willing to pay their expected value of a car. (a) Is there an equilibrium in the used-car market in which all types of cars are sold? Briefly explain.(b) Is there an equilibrium in the used-car market in which only lemons are sold? Briefly…arrow_forwardThe graph illustrates the utility functions for both Rashawn and Juliana, who both have the same amount of wealth. Rashawn Utility a. Who is more risk-averse? Neither Juliana's utility Rashawn's utility $3,000 Initial loss wealth $10,000 gain Stevenson/Wolfers, Principles of Economics, 1e, © 2020 Worth Publishers Wealth Juliana It is impossible to tell, based on the information.arrow_forwardThe idea that ethical judgments are universal was advanced by: a. Kant & Hare b. Dostoyevsky & Kant c. Bentham & Dostoyevsky d. Dostoyevsky & Harearrow_forward
- give an example of an existing economic interaction that exhibits moral hazard. describe the setting and talk about efficiency considerations.arrow_forwardThere are two types of people in the economy: low and high risk. Each earns $100. When they are healthy they get to consume the full $100. When they are ill they have to pay $100 of medical costs and have O left for consumption The government is has heard about adverse selection and is considering offering a single insurance plan and making everyone buy it. Using the information in the table below determine what plan the government will offer. The government's insurance plan will require people to pay a premium (tax) of $ when healthy and will give them a benefit of $ when ill. Low Risk High Risk Utility U = Vc U = Vc Percent of Population 70% 30% Risk of illness 10% 50%arrow_forwardIn the automobile insurance market, adverse selection occurs when Group of answer choices A) drivers with greater risks buy a policy with large deductibles. B) drivers with greater risks buy a policy with no deductibles. C) uninsured drivers drive recklessly. D) insured drivers drive recklessly.arrow_forward
- How can an anticipated change affect a market players decision?arrow_forwardAn insurance company is looking to provide a full coverage health insurance plan to the 10 professors in the economics department at the University of Alabama. Seven of these professors are in great health and will incur no medical expenses this year. Six professors have chronic conditions which require $5000 of medical care per year for each professor. a. If the insurance company is looking to insure the entire group, what will be the actuarially fair premium it charges? b. If professors have the option to enroll in the insurance plan, what will be the profit to the insurance company if it charges the premium in part (a)? c. Name the economic phenomenon occurring in this example.arrow_forwardConsider two people called Young and Old. Young and Old live together. Young can choose to party or not to party. Young values going to party at $10. The cost of the risk of getting Corona from going to the party is $1 for Young. However, the cost to Old of getting Corona from Young if he goes to the party is $20. a. Suppose there is no bargaining and that Young doesn't care about Old. What is Young's privately optimal action, Party or No Party? b. Given the answer to (a), does this maximize social surplus (Net Payoff of Young + Net Payoff of Old)? c. Suppose Young has a right to party (Old cannot forcibly prevent Young). Old and Young bargain over Young going to party. How much will Old have to offer Young to make him willing to not party?arrow_forward
- One method of solving this problem is through signaling. Signaling is a strategy one uses when they have information. The goal is to use a signal to convince the buyer that the good or service that is being sold is quality and will meet the buyer's wants. Offer an example of a company that uses a signal to help sell its product. What is the signal? What information is the signal trying to convey? Do you think the signal is effective? Why or why not? Does this signal improve market efficiency? Why or why not?arrow_forward23) Which of the following is an example of adverse selection? A) Individuals who have a history of not being careful with their possessions are more likely to insure them against accidental damage. B) Individuals with makes of cars that are widely known to be the target of car theft are more likely to insure their car. C) Individuals with possessions that are costly to replace are more likely to insure them against accidental damage. D) all of the abovearrow_forwardWhat is Moral Hazard, and how does moral hazard affect the likelihood a population demands medical care and the total demand for medical care?arrow_forward
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