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Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509

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BuyFindarrow_forward

Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509
Chapter 14, Problem 4CQQ
Textbook Problem
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The ability of insurance to spread risk is limited by

a. risk aversion and moral hazard.

b. risk aversion and adverse selection.

c. moral hazard and adverse selection.

d. risk aversion only.

To determine
Moral hazard and adverse selection.

Explanation of Solution

Option (b):

The risk-averse people would be very careful, so that they would not require any insurance. People may hide the important information to the insurance company, which results in more chances that the insurance company bears the cost. Thus, the option “b” is correct.

Option (a):

Moral hazard problem is the change in the behavior of people who bought the insurance. This would not restrict the diversification of risk. Thus, option ‘a’ is incorrect...

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