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 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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Students have asked these similar questions
Briefly explain what it means for information to be asymmetric.
a. What is Moral Hazard?
b. Identify and briefly explain three methods that insurance companies could use to off-set the moral hazard associated with their industry.
c. What is Adverse Selection?
Which of the following is an example of moral hazard?
Group of answer choices
A. Reckless drivers are the ones most likely to buy automobile insurance.
b. Retail stores located in high-crime areas tend to buy theft insurance more often than stores located in low-crime areas.
C. Drivers who have many accidents prefer to buy cars with air bags.
D. Employees recently covered by the company health plan start going to the doctor every time they get a cold.
E. Company divisions try to improve profitability at each other's expense.
What are some strategies for reducing adverse selection in insurance markets? What sorts of problems do these solutions cause?
Chapter 27 Solutions
Principles of Economics, 7th Edition (MindTap Course List)
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Similar questions
- How might adverse selection make it difficult for an insurance market to operate?arrow_forwardIf people get higher pay from insurance than their premiums. Will this increase or decrease the death rate of average persons? Is this an example of moral hazard or adverse seletion? How will an insurance company deal with these problems?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
- For 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_forwarda. If a pay-as-you-drive insurance program is being implemented to cope with automobile-related externalities associated with driving, what factors should be considered in setting the premium? b. Would you expect a private insurance company to take all these factors into account? Why or why not?arrow_forwardPeople drive faster when they have auto insurance. This is an example of: a. Adverse selection. b. Asymmetric information. c. Moral hazard.arrow_forward
- 2. Cyclists travel faster on their bicycles when wearing helmets. Is this an example of adverse selection or moral hazard? Explain your answer.arrow_forwardName two solutions to adverse selection in insurance and explain how they work.arrow_forwardGeorge Akerloff focused the market for used cars and discussed an issue later generally called the "lemons problem." A "lemon" is a low quality used car, with the seller but not the potential buyer aware of this. Since sellers have more information about the quality of the car: a. adverse selection causes an inefficiently large number of transactions to occur. b. moral hazard causes an inefficiently large number of transactions to occur. c. moral hazard causes an inefficiently small number of transactions to occur. d. adverse selection causes an inefficiently small number of transactions to occur.arrow_forward
- Suppose an individual saves as precaution against adverse events, like unemployment. This is an example of a-adverse selection b-self-insurance c-adverse saving d-moral hazardarrow_forward1)Describe an example of moral hazard that we may run into in the real world. Think of something that is legal and not inherently lethal, yet still demonstrates elevated risk for the participant who would likely act safer if insurance or protection was not available. Explain why someone might take this risky action. What are the benefits to the risky behavior? In your response to two of your peers, explain what an insurance company may do to reduce the likelihood that an individual would take this risk. Keep in mind, that we cannot always just deny coverage if an individual is participating in the risky behavior.arrow_forwardDon't use pen or paperarrow_forward
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