Indicate whether the statement is true or false, and justify your answer.If buyers care sufficiently more about cars than do sellers, then there are prices at which transactions can occur. In that scenario, there is no longer any adverse selection (although there still may be some information asymmetry).

Indicate whether the statement is true or false, and justify your answer.If buyers care sufficiently more about cars than do sellers, then there are prices at which transactions can occur. In that scenario, there is no longer any adverse selection (although there still may be some information asymmetry).

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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Similar questions

Indicate whether the statement is true, false, or unclear, and justify your answer.A previously uninsured man who enrolls in his workplace health insurance plan after being diagnosed with multiple sclerosis is an example of 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.
Suppose that left-handed people are more prone to injury than right-handed people. Lefties have an 80 percent chance of suffering an injury leading to a $1,000 loss (in terms of medical expenses and the monetary equivalent of pain and suffering) but righties have only a 20 percent chance of suffering such an injury. The population contains equal numbers of lefties and righties. Individuals all have logarithmic utility-of-wealth functions and initial wealth of $10,000. Insurance is provided by a monopoly company. a.Compute the “first best” for the monopoly insurer b.Try to characterize the “second best” contracts as well as you can (start from the profit maximization problem and write down the four relevant constraints, point out which constraints matter, which ones don’t, proceed as much as you can, etc.). In addition: assume perfectly competitive insurance market instead of monopoly, and find (i) the first best and (ii) the second-best contracts.
Which of the following statements is FALSE regarding the concept of "adverse selection"? 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.
Indicate whether the statement is true, false, or unclear, and justify your answer.Although a firm prediction of Akerlof’s model, the adverse selection death spiral has never been observed in practice.
Indicate whether the statement is true or false, and justify your answer.New York has seen a majority of people change their behaviors because of the recent requirement that restaurants list the calorie counts for all their menu items.
Indicate whether the statement is true or false, and justify your answer.Private markets are powerless to combat adverse selection, so the only solution is a government-mandated insurance contract.
Indicate whether the statement is true, false, or unclear, and justify your answer.The fact that more free-plan participants logged ER visits for broken bones than costsharing plan participants in the RAND Health Insurance Experiment is evidence of moral hazard.
Indicate whether the statement is true or false, and justify your answer.Having generous insurance makes you fat because you do not pay the full health costs of eating poorly and not exercising.
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.
Indicate whether the statement is true, false, or unclear, and justify your answer.In some markets, adverse selection develops over time as customers learn about their own risk levels.
Indicate whether each statement is true or false, and justify your answer.Cost-sharing is used to combat moral hazard at the expense of equity.