Adverse selection is the phenomenon where it is not possible to have a Pareto improvement, no matter how the government selects the initial distribution of Income B charging a higher insurance premium to cover the costs of risk actually leads to the situation in which only the most risky buy the insurance, and this causes that market to fail. people select the wrong indifference curve. information is withheld from the government so it cannot make the necessary selection of the correct amount of public good to produce
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- Multiple Choice Adverse selection describes a situation where an individual's demand for insurance is positively correlated with the individual's risk of loss. Adverse selection occurs when someone increases their exposure to risk when insured. This can happen, for example, when a person takes more risks because someone else bears the cost of those risks. The relationship between smoking status and mortality provides a good illustration for adverse selection, especially in the case in which a life insurance company did not vary its premiums according to smoking status of its customers. To counter the effects of adverse selection, insurers may offer premiums that are proportional to a customer's risk.Suppose a consumer has S100 today and he tells you he is willing to wait X amount of time for another $50. The same consumer also tells you that in the future if he has $10 he ts willng to wait Y amount of time for another $50.If Y is greater than X, does the individual exhibit hyperbolic discounting, exponential discounting, or is there not enough information to determine? Briely explain your answer.Do you think Canada's universal health care program can alleviate problems caused by moral hazard and adverse selection in the private insurance markets? Why or why not? John's utility curve over total wealth is given by U(W) =VW (i.e. square root of W). Suppose that he has a 50% chance of being healthy. If he is healthy, he gets all his wealth-$10,000. If he becomes sick, he only has $3,600 remaining after medical expenditures. Calculate John's wealth and utility when he does and does not get sick, his expected utility, expected wealth, and his expected loss. Now he has the option of buying health insurance Calculate the maximum amount John would be willing to pay to fully insure against the cost of the sickness. How much is the actuarially fair and risk premium? Suppose that society consists of large, equal numbers of identical male and identical female consumers. Male consumers are similar to John; female consumers differ only in that they face a 25% probability of being sick, but…
- Consider an individual for whom utility is U = ln(I) There are two states of the world (G,B): Outcome G = 2000 with probability .4 Outcome B = 1000 with probability .6 W1 = 2000 L = 1000 π = .6 Option = invest $50 to lower π to .2 An insurance company is willing to offer a contract in which the individual pays a premium and gets full compensation for the loss (1000) in the bad state. a) With no insurance but the option of investing the $50, what is the utility of the individual? b) What is the first-best outcome for utility of the individual, insurance premium, and profits of the insurance company?Tom, who has a utility-of-wealth function U(w) = ln(w + 10), has $500 of income before tax and is taxed at a rate of 25% of earned income. If he is caught underreporting his income he will have to pay the taxes owed and in addition will pay a fine of $2 for every dollar of income he failed to report. How much income will he conceal (i.e., fail to report) if the probability of being caught is 0.1? Also find the market opportunity line and determine the minimum amount of fine such that there is no tax evasion at all.Let W represents an individual’s annual earned income and U(W) = (W/10)0.5 is this individual’s von Neumann-Morgenstern utility index (or utility function) . This individual earned income is $49,000. This individual faces the prospect of a 20% chance of needing health care, with a price tag of $13,000. Assume this person is risk averse. Also assume that the insurance company has only claim costs and that administrative costs are $0. The maximum health insurance premium this individual is willing to pay is??
- Suppose that country has adopted a risk-adjustment scheme to help combat risk selection. Suppose further that a sickness fund has become particularly adept at controlling costs associated with a certain illness/disease. In fact, the fund routinely treats customers with that particular illness for less than the national average cost of treating that illness. In this case, _____. A. the fund may actually make money by enrolling individuals with that illness. B. the fund would loose money enrolling individuals with that illness. C. the fund would be indifferent to enrolling people with that illness.Suppose 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…Suppose, if ill, that Fred’s demand for health services is summarized by the demand curve Q = 50 − 2P , where P is the price of services. How many services does he buy at a price of $20? Suppose that Fred’s probability of illness is 0.25. What is the actuarially fair price of health insurance for Fred with a zero coinsurance rate? If the insurance company pays Fred’s entire loss, will the insurance company offer him insurance at the actuarially fair rate? Why? Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
- Give typing answer with explanation and conclusion Suppose that a consumer’s demand curve for medical care is QD = −3P +17 with P = $5. Suppose that the beneficiary obtains an insurance plan through an insurer with a 25% coinsurance rate. Under the insurance arrangement, find the following: (a) Equilibrium price and quantity of medical care? (b) Magnitude of deadweight loss? (c) Cost to the beneficiary? (d) Cost to the insurer?Suppose the probability that Recall Scarlett is sued is .1 and her income is 1000. In the case, she is sued she will lose all of her income in the settlement. She may purchase malpractice insurance at a rate of $r per $1 of coverage. Finally assume that her utility of income is U($) = ($)^1/2. What is Scarlett’s demand curve for insurance (that is find her demand for insurance for all r ≥ .1)?ASAP Consider an individual for whom utility is U = ln(I) There are two states of the world (G,B): Outcome G = 2000 with probability .4 Outcome B = 1000 with probability .6 W1 = 2000 L = 1000 π = .6 Option = invest $50 to lower π to .2 An insurance company is willing to offer a contract in which the individual pays a premium and gets full compensation for the loss (1000) in the bad state. a) With no insurance but the option of investing the $50, what is the utility of the individual? b) What is the first-best outcome for utility of the individual, insurance premium, and profits of the insurance company?