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A: Adverse selection occurs when there is asymmetric information between the seller and the buyer.
Indicate whether the statement is true or false, and justify your answer.
When insurance is fair, in a sense, it is also free.
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- Indicate whether the statement is true or false, and justify your answer.Insurance represents a transfer of wealth from healthy states to sick states.Indicate whether the statement is true or false, and justify your answer.Risk-averse consumers always prefer insurance that is actuarially fair but not full to full insurance that is actuarially unfair – but the opposite is true for risk-loving consumers.Indicate whether the statement is true or false, and justify your answer.In an actuarially fair insurance contract, the insurance premium equals the probability of sickness times the payout amount.
- 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.Which one is not true about the private insurance market Only the frail customers are insured fully and much of the population is underinsured Under certain conditions can lead to uninsurance for everyone Maximizes government involvement Maximizes adverse selectionIndicate whether the statement is true, false, or unclear, and justify your answer.If a health insurance company could somehow monitor everything a customer does and thinks, it could create a full-insurance contract with no moral hazard.
- Describe the challenges that adverseselection and moral hazard pose for insurance.Indicate whether the statement is true, false, or unclear, and justify your answer.Pauly (1974) shows that the socially optimal level of insurance in a market is either full or none, depending on whether moral hazard or risk aversion predominates.Distinguish between adverse selection and moral hazard as they relate to the insurance industry.
- Consider an individual whose utility function over income I is U(I), where U is increasing smoothly in I (U’ > 0) and convex (U” > 0). Draw a utility function in U - I space that fits this description. Explain the connection between U” and risk aversion. True or false: this individual prefers no insurance to an actuarially fair, full contract. Be sure to explain your answer.Indicate whether each statement is true or false, and justify your answer.Insurance mandates do little to combat the problem of adverse selection.Indicate whether the statement is true or false, and justify your answer.There are no possible utility functions in which a person is indifferent between actuarially fair, full insurance and actuarially fair, partial insurance.