Microeconomics, Student Value Edition (2nd Edition)
2nd Edition
ISBN: 9780134461786
Author: Daron Acemoglu, David Laibson, John List
Publisher: PEARSON
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Question
Chapter 16, Problem 8P
(a)
To determine
Action taken if decision of purchasing of fridge was put to a vote and the roommates were asked to pay
(b)
To determine
Reason for plan not working when each roommate decides on own contribution, and for it to work if there is no asymmetric information.
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Suppose that every driver faces a 1% probability of an automobile accident every year. An accident will, on average, cost each driver $15,000. Suppose there are two types of individuals: those with $90,000.00 in the bank and those with $3,000.00 in the bank. Assume that individuals with $3,000.00 in the bank declare bankruptcy if they get in an accident. In bankruptcy, creditors receive only what individuals have in the bank. Assume that both types of individuals are only slightly risk averse.
In this scenario, the actuarially fair price of full insurance, in which all damages are paid by the insurance company, is
.
Assume that the price of insurance is set at the actuarially fair price.
At this price, drivers with $3,000.00 in the bank likely buy insurance, and those with $90,000.00 in the bank likely buy insurance. (Hint: For each type of driver, compare the price of insurance to the expected cost without insurance.)
Suppose a state law has been passed…
Suppose every driver faces a 1.5% probability of an automobile accident every year, and on an average an accident will cost each driver $10,000. Suppose there are two types of individuals: those with $50,000 and those with $6,000 in the bank. Assume that individuals with $6,000 in the bank declare bankruptcy if they get in an accident. In the bankruptcy, creditors receive only what individuals have in the bank.
What is the expected loss from an accident for individuals with $6,000 in the bank if they don’t buy comprehensive insurance coverage?
a.
$50,000.00
b.
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c.
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d.
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Suppose that there is asymmetric information in the market for used cars. Sellers know the quality of the car that they are selling, but buyers do not.
Buyers know that there is a 30% chance of getting a "lemon", a low quality used car. A high quality used car is worth $30,000, and a low quality used car is worth $15,000. Based on this probability, the most that a buyer would be willing to pay for a used car is $___
Chapter 16 Solutions
Microeconomics, Student Value Edition (2nd Edition)
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- In the famous court case Stambovsky v. Ackley a prospective homebuyer attempts to back out of a purchase after learning that the home was widely believed to be haunted since the current owner had it included in a tour of haunted homes. Prior to the prospective buyer backing out, what imperfect information situation applied to this situation? Explain.arrow_forwardSuppose that every driver faces a 2% probability of an automobile accident every year. An accident will, on average, cost each driver $14,000. Suppose there are two types of individuals: those with $112,000.00 in the bank and those with $3,500.00 in the bank. Assume that individuals with $3,500.00 in the bank declare bankruptcy if they get in an accident. In bankruptcy, creditors receive only what individuals have in the bank. Assume that both types of individuals are only slightly risk averse. In this scenario, the actuarially fair price of full insurance, in which all damages are paid by the insurance company, is . Assume that the price of insurance is set at the actuarially fair price. At this price, drivers with $112,000.00 in the bank likely buy insurance, and those with $3,500.00 in the bank likely buy insurance. (Hint: For each type of driver, compare the price of insurance to the expected cost without insurance.) Suppose a state law has been passed…arrow_forwardAssume that the market for lemons has unraveled. Who is harmed by the existence of asymmetric information? Who is helped?arrow_forward
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