6. Problems in insurance markets Consider the following story: Province Ranch, an industry leading provider in vehicle insurance, recently expanded to cover motorhomes. Province Ranch had concerns that the most likely motorhome insurance customers are those who drive their motorhomes in high-density traffic areas (thus exposing them to the most damage on the road), because they would benefit most from insurance coverage. Since Province Ranch is unable to distinguish perfectly between high-risk and low-risk areas, it raised its motorhome premiums in an effort to account for the riskier drivers. The economic problem in this story is known as: Adverse selection Screening O Signaling Moral hazard

6. Problems in insurance markets Consider the following story: Province Ranch, an industry leading provider in vehicle insurance, recently expanded to cover motorhomes. Province Ranch had concerns that the most likely motorhome insurance customers are those who drive their motorhomes in high-density traffic areas (thus exposing them to the most damage on the road), because they would benefit most from insurance coverage. Since Province Ranch is unable to distinguish perfectly between high-risk and low-risk areas, it raised its motorhome premiums in an effort to account for the riskier drivers. The economic problem in this story is known as: Adverse selection Screening O Signaling Moral hazard

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter19: The Basic Tools Of Finance

Section: Chapter Questions

Problem 7PA

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How can moral hazard lead to more costly insurance premiums than one was expected?
In an insurance system, would you expect each person to receive in benefits pretty much what they pay in premiums or is it just that the average benefits paid will equal the average premiums paid?
6 Which of the following concepts can be used to characterise the relationship between an insurer and insurance applicants? a. Nash equilibrium b. asymmetric information c. Pareto efficiency d. firm-specific assets e. employment rent
12. To prevent adverse selection, health and life insurance companies Question 12 options: a) charge the same premiums to all policyholders. b) require potential policyholders to submit medical records or submit to an examination, and may refuse to sell policies to people with certain pre-existing health conditions. c) charge lower premiums to policyholders with a higher risk of filing claims. d) always charge the same premiums to people regardless of certain pre-existing conditions.
1) A key difficulty facing insurance companies is that people know more about their health than do insurance companies, and that those people who are seriously ill are the most likely to want to obtain health insurance. What is this phenomenon called? A) moral hazard B) economic irrationality C) asymmetric information D) adverse selection 2) An insurance company is likely to attract customers like Clancy who want to purchase insurance because he knows better that the company that he is more likely to make a claim on a policy. What is the term used to describe the situation above? A) moral hazard B) adverse selection C) asymmetric information D) economic irrationality 3) The term that is used to refer to a situation in which one party to an economic transaction has less information than the other party is A) inefficient market hypothesis. B) moral hazard. C) information disparity. D) asymmetric information. 4) Which of the following parties is…
To what sorts of customers would an insurance company offer a policy with a high copay? What about a high premium with a lower copay?
7. What are the three approaches to achieving a distinct and valuable strategic position? Select one: a. few needs, many customers; broad needs, few customers; broad needs, many customers. b. many needs, few customers; little need, many customers; narrow needs, few customers. c. low-cost products; huge market needs; unique products. d. poor products available; few products available; no products available.
10 What is informed consent in research? Select one: a. Involves deceiving research participants about the study their about to participate in so that the researcher can get better data. b. A process where a researcher must fully inform their research participants about their study (and all the risks and benefits) before they ask for permission to conduct a healthcare intervention. c. An information session about consent before being intimate. d. Information finding on a research topic
7 Consider a supply chain with the manufacturer, the retailer and end-users, using a buy-back contract, as below cost-benefit & demand forecasting details: F=$120,000 ; c=$30 ; w=$75 ; b=$50 ; p=$122 ; s=$15; Demand 1,800 1,920 2,040 2,160 Probability 26% 27% 29% 18% Calculate the retailer’s marginal profit, retailer’s marginal loss, manufacturer’s marginal profit. Calculate the expected profit of the retailer and the manufacturer for 4 above-mentioned demand scenarios. Then, conclude on which production quantity Q to maximize manufacturer’s expected profit, which production quantity Q to maximize retailer’s expected profit.
7 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?