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- Describe two empirical studies that suggest demonstrate the market effects of asymmetric informationExplain the relationship between moral hazard and insurance premiumsWhy does the lemon market problem occur where sellers of unqualified goods stay in the market, while sellers who have quality goods leave the market? This means there is a quality problem. In the context of asymmetric information, does it include adverse selection or moral hazard?
- In circumstances of imperfect information should one expect the market to be efficient? Explain briefly.The text points out that asymmetric information can have deleterious effects on market outcomes. a. Explain how asymmetric information about a hidden action or a hidden characteristic can lead to moral hazard or adverse selection. b. Discuss a few tactics that managers can use to overcome these problems.Which is not an example of asymmetric information? Group of answer choices A customer not knowing which insurance plan is best A client making a purchase of a used private airplane of unknown condition A mail carrier making her deliveries An insurer not having the full information about a client’s drug use A tree service recommending needless pruning on fruit trees is an example of: Group of answer choices adverse selection. mutually beneficial trades. moral hazard. a trade fallacy.
- Suppose an insurance company wants to charge a very healthy individual a premium of $1,200 a year for health coverage. It also wants to charge a less healthy individual a premium of $3,600 a year for health coverage. It is seeking to ascertain from any given customer information regarding his/her health by asking for several pieces of health-related information, such as doctor assessments of the person’s health, history of health-related problems, etc. The opportunity cost of a very healthy person securing a health report is $250 and the opportunity cost of a less healthy person securing a health report is $650. Of the choices below, how many reports should the company request to best ensure its paying the right premium to the right person? Reconsider the previous health insurance question. Of the choices below, which one is closest to the spread between the minimum possible number of reports and the maximum possible reports to achieve the company’s desired outcome? Reconsider again…Suppose low-risk individuals are risk-averse enough to fully insure at premiums high enough for insurers to cover both high and low-risk individuals. This is an example of a _____ equilibrium and is an ______ outcome. a-pooling/inefficient b-pooling/efficient c-separating/inefficient. d-separating/efficientList two possible solutions private insurance firms have at their disposal to correct the market failure due to the asymmetry of information...
- Asymmetric information can lead to adverse selection which means: a. Only a specific subset of a market participates, usually in an adverse way from the point-of-view of just the seller. b. Only a specific subset of a market participates, usually in an adverse way from the point-of-view of either the seller or the buyer. c. Only a specific subset of a market participates, usually in an adverse way from the point-of-view of just the buyer. d. Every subset of a market participates, usually in an adverse way from the point-of-view of either the seller or the buyer.Describe the two problems arising from asymmetric information, namely: Adverse selection; and Moral hazard.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 market failure? a. Only good quality cars are sold, hence the market under-provides used cars. b. Both poor and good quality cars are sold, hence the market over-provides used cars. c. Only poor quality cars are sold, hence the market under-provides used cars. d. Both poor and good quality cars are sold, hence the market efficiently provides used cars.
