A medical test that an insurance company could use to distinguish between high- and low-risk types would create an equilibrium in which both high- and low-risk types could have full insurance. Sketch a brief proof using a diagram. Why is this equilibrium not an equilibrium under the normal information asymmetry assumptions? Show which of the three equilibrium criteria does not hold.
A medical test that an insurance company could use to distinguish between high- and low-risk types would create an equilibrium in which both high- and low-risk types could have full insurance. Sketch a brief proof using a diagram. Why is this equilibrium not an equilibrium under the normal information asymmetry assumptions? Show which of the three equilibrium criteria does not hold.
Managerial Economics: A Problem Solving Approach
5th Edition
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Chapter19: The Problem Of Adverse Selection
Section: Chapter Questions
Problem 19.5IP
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A medical test that an insurance company could use to distinguish between high- and low-risk types would create an equilibrium in which both high- and low-risk types could have full insurance. Sketch a brief proof using a diagram. Why is this equilibrium not an equilibrium under the normal information asymmetry assumptions? Show which of the three equilibrium criteria does not hold.
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