ur 1. (a) Explain the difference between adverse selection and moral hazard.(b) How can adverse selection be dealt with? Would the involvement of the government in, say, a health-insurance market suffering from adverse selection problems rectify the situation, or would it create moreproblems?(b) Examine the table below. The insurance company does not know the probabilities of falling sick for eachindividual.Probability of falling sick0.20Insurance BuyerLost income if sick (Tk.)15,000AВ0.1525,00015,00030,00025,00015,000C0.10D0.10E0.05F0.15(i) If the company charged everybody a premium of Tk.3,000, who would stay and who would leave theinsurance market? Say why.(ii) If the company charged everybody a premium equal to the average of the actuarially fair premiums forall, who would stay and who would leave the insurance market? Say why.6-

Economics is a branch of social science that describes and analyzes the behaviours and decisions…

1. (a) Explain the difference between adverse selection and moral hazard. (b) How can adverse selection be dealt with? Would the involvement of the government in, say, a health- insurance market suffering from adverse selection problems rectify the situation, or would it create more problems?

1. (a) Explain the difference between adverse selection and moral hazard. (b) How can adverse selection be dealt with? Would the involvement of the government in, say, a health- insurance market suffering from adverse selection problems rectify the situation, or would it create more problems?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.4P

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Question

1. (a) Explain the difference between adverse selection and moral hazard.
(b) How can adverse selection be dealt with? Would the involvement of the government in, say, a health-
insurance market suffering from adverse selection problems rectify the situation, or would it create more
problems?
(b) Examine the table below. The insurance company does not know the probabilities of falling sick for each
individual.
Probability of falling sick
0.20
Insurance Buyer
Lost income if sick (Tk.)
15,000
A
В
0.15
25,000
15,000
30,000
25,000
15,000
C
0.10
D
0.10
E
0.05
F
0.15
(i) If the company charged everybody a premium of Tk.3,000, who would stay and who would leave the
insurance market? Say why.
(ii) If the company charged everybody a premium equal to the average of the actuarially fair premiums for
all, who would stay and who would leave the insurance market? Say why.
6-

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Can you answer part A and B please? I do not understand them. Thank you so much :) Part A. Suppose Rock earns $100,000 if he is healthy, and $80,000 if he falls ill. Suppose further that he has a 0.25% chance of falling ill. If Rock were to purchase full insurance, the payout would be equal to ____. The actuarially fair premium for this payout would be equal to ____. $100,000; $250 $50; $20,000 $70,000; $350 $20,000; $50 $350; $70,000 PART B: Suppose that there is a 20% chance Malik is injured and earns $100,000, and an 80% chance he stays healthy and will earn $500,000. Suppose further that his utility function is the following (utility = square root of income) �=�� Malik's utility if he earns $100,000 is ____ and his utility if he earns $500,000 is ____. Suppose that there is a 20% chance Malik is injured and earns $100,000, and an 80% chance he stays healthy and will earn $500,000. Suppose further that his utility function is the…
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