Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN: 9781285165875
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Question
Chapter 27, Problem 4QCMC
To determine
Moral hazard and adverse selection.
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Students have asked these similar questions
The ability of insurance to spread risk is limited bya. risk aversion and moral hazard.b. risk aversion and adverse selection.c. moral hazard and adverse selection.d. risk aversion only
Individuals will prefer to fully insure against a potential adverse event if
A. individuals are risk-loving and insurance is priced at an actuarially fair rate.
B. individuals are risk-averse and insurance is priced at an actuarially fair rate.
C. individuals are risk-loving and insurance is priced above the actuarially fair rate.
D. individuals are risk-averse and insurance is priced above the actuarially fair rate.
12. Why do individuals act in riskier ways
after being insured?
A. Due to the problem of adverse selection
B. Due to the problem of false confidence
C. Due to the problem of moral hazard
D. Due to the problem of screening costs
Chapter 27 Solutions
Principles of Economics, 7th Edition (MindTap Course List)
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- How might adverse selection make it difficult for an insurance market to operate?arrow_forward30. The problem of moral hazard arises because a. life is full of all sorts of risks. b. after people buy insurance, they have less incentive to be careful about their risky behavio c. a high-risk person is more likely to apply for insurance than is a low-risk person. d. insurance companies go to great effort to avoid paying claims to their policy holders.arrow_forwardFor 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 insurancearrow_forward
- An insurance company suffers from adverse selection if Select one: a. Safe customers are less likely to insure than risky customers b. Customers know their willingness to pay for insurance but the company does not c. Its customers are risk averse d. Customers take on much greater risk because than insurearrow_forward7 3. How would the utility of a risk lover look like? a. Graph the utility function. Will this person be willing to pay for insurance?arrow_forward___ 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 Selectionarrow_forward
- 2. Below is a market for health insurance, with 5 people. Their expected costs, risk premiums, and willingness to pay for insurance are given. The average expected costs are 92. a.Suppose an insurance company offers a premium equal to 92. Determine who will buy and won't buy at that premium (top chart to fill in). Find the insurer's revenue, expenses and profit at that premium (bottom chart to fill in). Then repeat for the higher premiums in periods 2 and 3. Expected Risk Period 1 Willingness Premium to Pay 22 Period 2 Period 3 Costs Premium=$92 Premium=$130 Premium=$180 Person 1 20 2 Person 2 40 5 45 Person 3 80 15 95 Person 4 120 30 150 Person 5 200 60 260 Total 460 Mean 92 Insurer Revenue Insurer Expenses Profit a. Over time, what is happening to the number and type of people in the market for insurance, and what is happening to insurer profits? +arrow_forwardFor each of the following kinds of insurance, give anexample of behavior that can be called moral /raumtand anotJ,cr example of behavior that can be calledadverse selection.a. health insuranceb. car insurancec. tile insurancearrow_forwardQUESTION 1 An expected utility maximiser owns a car worth £60 000 and has a bank account with £20 000. The money in the bank is safe, but there is a 50% probability that the car will be stolen. The utility of wealth for the agent is u(y) = In(y) and they have no other assets. QUESTION 2 Consider the setup from Question 1. A risk-neutral insurance company is willing to insure the car at the premium of :£2/3 for every one pound of coverage.arrow_forward
- What term do economists use to describe the tendency for people to prefer certain outcomes over risky situations? a. The precautionary principle b. Risk differentiationc. Risk uncertainty d. Risk aversion e. Risk managementarrow_forward2. Suppose that a farmer usually makes profit of $120,000 per year. Let's say that there is a 2% chance that a tornado will hit the farm. This would strongly hurt farmer's profit, leading to losses of $96,000 with 2% probability. a. What is the actuarially fair insurance? b. Assume that the farmer utility is given by u = T 0.5 where t represents profit. What is the farmer's expected utility with no insurance? c. How much would the farmer be willing to pay to have insurance? d. Assume that the farmer expects that the tornado's effect to your farm is lower, only leading to losses of $70,000. i. What is the actuarially fair insurance? ii. What is the farmer's expected utility with no insurance? iii. How much would the farmer be willing to pay to have insurance? iv. What is the risk premium?arrow_forward21arrow_forward
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