Adverse selection can occur when a. all persons involved in a transaction have full information one person has information not available to others
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- For each of the following purchases, say whether you would expect the dogma of imperfect information to be relatively high or relatively low: Buying apples at a roadside stand Buying dinner at the neighborhood restaurant around the comer Buying a used laptop computer at a garage sale Ordering flowers over the internet for your friend in a different cityA producer collects he initial premium for a healih policy and gives he applicant a conditional receipt. In lhis situation lhe policy becomes effective at which of the following limes? A.When he premium is received in lhe insurance company's home office B.When the policy is delivered C.When the conditions of the receipt are met D.When the premium check clears the bank[Adverse Selection] Each of the two players receives an envelope, in which there is anamount of money that is equally distributed from $0, $1, $2, ..., $100. The amounts in twoenvelopes are independent. After receiving the envelope, each individual can check exactlyhow much money is put in his/her own envelope. Then each player has the option to exchangehis/her envelope for the other individual's prize. The decisions are made simultaneously. Ifboth individuals agree to exchange, then the envelopes are exchanged; otherwise, if at leastone player chooses not to exchange, each individual keeps his/her own envelope and receivesits attached sum of money.a. Model this game as a static Bayesian game (write the normal formrepresentation) and find the Bayesian Nash equilibrium.b. Consider a new game where the probability distribution of money in eachenvelope is changed. The amount is equal to $100 with probability 90%, and is equalto each number in $0, $1, $2, ... ,$99 with probability 0.1%.…
- Dr. Wexler displays her medical degree in her officewaiting room, hoping patients will be impressed thatshe attended a prestigious medical school. This isan example ofa. moral hazard.b. adverse selection.c. signaling.d. screening.do this ignore leacture informationSetup from Question 1) An expected utility maximiser owns a car worth £60000 and has a bank account with £20000. 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)=ln(y) and they have no other assets. Setup from question 2)Consider the setup from Question 1. A risk-neutral insurance company is willing to insure the car at the premium of π=£2/3 for every one pound of coverage. Question 3:
- My answer is wrong The answer:adverse selection causes an inefficiently large number of transactions to occur. is wrong!!!Say there are two individuals; Hala and Anna who are deciding on either to buy health insurance on a pooling arrangement basis or otherwise. Both face a 30% probability of losing RM40 on medical services and 70% of losing nothing. With these information discuss whether Hala and Anna should join this arrangement or pay the medical services costs out of their own pocket money.A risk-neutral plaintiff in a lawsuit must decide whether to settle a claim or go to trial. The defendants offer $50,000 to settle now. If the plaintiff does not settle, the plaintiff believes that the probability of winning at trial is 50% if the plaintiff wins, the amount awarded to the plaintiff is X Will the plaintif settle if x is $62,500? What if X-$250,000? What is the critical value of X that would make the plaintiff indifferent between setting and going to trial? it the plaintiff were risk averse instead of risk neutral, would this critical value of X be higher or lower? If the amount to be awarded at trial with a win (X) were $62,500, then the plaintiff would settle If the amount to be awarded at trial with a win (X) were $250,000, then the plaintiff would not settle The critical value of X that would make the plaintiff indifferent between settling and going to trial is $ (Enter your response using rounded to wo decimal places)
- information refers to a market where one side (either the buyer or theseller, but usually the buyer) has less information than the other side of themarket. When there is asymmetric information in a market, markets are inefficientbecause the side with less information doesn't want to take the risk involved inbuying (or selling) the good or service.One method of solving this problem is through screening. Screening is a strategyone uses when they don't have information. A screen can be any indicator thatlets the screener know if the good or service is reliable and will meet thescreener's wants.Offer an example of when you used screening to solve a lack ofinformation. What kind of screen did you use?• Was the screen effective? Were you happy with the result?In the ____ system, risk selection may arise. This is when _____. A. Bismarck; insurers seek out healthy customers. B. Beveridge; insurers seek out health customers C. Beveridge; high-risk customers seek out health insurance D. Bismarck; high-risk customers seek out health insuranceSuppose the equilibrium price for good quality used cars is $20,000. And the equilibrium price for poor quality used cars is $10,000. Assume a potential used car buyer has imperfect information as to the condition of any given used car. Assume this potential buyer believes the probability a given used car is good quality is .60 and the probability a given used car is low quality is .40. Assume the seller has perfect information on all cars in inventory. How does the informational imbalance result in adverse selection? a. The expectedprice offered by the buyer encourages the seller to sell a poor quality car. Hence only poor quality cars are sold, which harms sellers. b. The expected price offered by the buyer encourages the seller to sell a good quality car. Hence only good quality cars are sold, which harms buyers. c. The expected price offered by the buyer encourages the seller to sell a good quality car. Hence only good quality cars are sold, which harms sellers. d. The…