Managerial Economics: A Problem Solving Approach
5th Edition
ISBN: 9781337106665
Author: Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher: Cengage Learning
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Chapter 19, Problem 7MC
To determine
Risk averse.
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Suppose an individual saves as precaution against adverse events, like unemployment. This is an example of
a-adverse selection
b-self-insurance
c-adverse saving
d-moral hazard
From utility theory, the demand for insurance depends on the level of risk aversion (i.e. how much you hate uncertainty), the cost of insurance (i.e. if it is within your willingness to pay), as well as wealth. Can you think of anything else that affects demand for insurance?
In the context of asymmetric information, adverse selection and moral hazard, how does marketFailure occur? (Make reference to the insurance or financial market)
Chapter 19 Solutions
Managerial Economics: A Problem Solving Approach
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- If you understand the principles of insurance, you will understand why it probably makes sense to purchase insurance to guard against large losses, like the destruction of a home you own, but probably does not make sense to purchase insurance to guard against small losses, like the failure of a TV you buy.arrow_forwardThe ability of insurance to spread risk is limited bya. risk aversion and moral hazard.b. risk aversion and adverse selection.c. moral hazard and adverse selection.d. risk aversion onlyarrow_forwardQ1. Insurance works by spreading risk over - a. the uninsured b. a few people c. several insurance companies d. Many people Q2. Determining the risk associated with a particular group or activity is called - a. discounting b. risk determination c. forecasting d. underwritingarrow_forward
- Both types of insurance customers receive the same insurance policy. Choice 1 of 2:True Choice 2 of 2:Falsearrow_forwardexplain the difference between moral hazard and adverse selection using the example of health insurance. what are the consequences of each of them for the functioning of private insurance markets?arrow_forwardWhen you choose to buy insurance, are you speculating? When you choose not to buy insurance, are you also speculating? Explain.arrow_forward
- Explain the purpose of insurance. If a mother purchases health insurance for her and her four (4) children, who is the policyholder, and who is (are) the beneficiaries?arrow_forwardPortray a utility function for money that “explains” why a person might buy a lottery ticket (and therefore appears risk acceptant) and also pur- chase a homeowner’s insurance policy (appearing risk averse).arrow_forwardBreifly discuss the factors that determine demand for an insurance policy and how they different then normal determinant demand of a commodity?arrow_forward
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