PRINC OF ECONOMICS PKG >CUSTOM<
7th Edition
ISBN: 9781305018549
Author: Mankiw
Publisher: CENGAGE C
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Chapter 22, Problem 2CQQ
To determine
The example of moral hazard.
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Suppose an individual saves as precaution against adverse events, like unemployment. This is an example of
a-adverse selection
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c-adverse saving
d-moral hazard
If people get higher pay from their insurance than their premiums, will this increase or decrease the death rate of average person? Is this example of moral hazard or adverse selection? How will the insurance company deal with this problem ?
If people get higher pay from insurance than their pre premiums. Will this increase or decrease the death rate of average persons? Is this an example of moral hazard or adverse selection? How will an insurance company deal with these problems.
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- How might adverse selection make it difficult for an insurance market to operate?arrow_forwardGeorge has a life insurance policy that pays hisfamily $1 million if he dies. As a result, he doesnot hesitate to enjoy his favorite hobby of bungeejumping. This is an example ofa. moral hazard.b. adverse selection.c. signaling.d. screeningarrow_forwardIn the context of asymmetric information, adverse selection and moral hazard, how does marketFailure occur? (Make reference to the insurance or financial market)arrow_forward
- Define the difference between moral hazard and adverse selection using an example. .arrow_forwardThe used car market can become a “lemon” market, where sellers of poor quality used cars will stay in the market, while sellers of good quality used cars will exit the market. Why is this happening? Is this adverse selection or moral hazard? Give an argumentarrow_forwardIdentify each of the following as an adverse selection or a moral hazard problema. A person with car insurance fails to lock his car doors when he shops at a mall.b. A person with a family history of cancer purchases the most complete health coverage available.c. A person with health insurance takes more risks on the ski slopes of Aspen than he would without health insurance.d. A college professor receives tenure (assurance of permanent employment) from her employer.e. A patient pays his surgeon before she performs the surgery.arrow_forward
- Because Elaine has a family history of significantmedical problems, she buys health insurance,whereas her friend Jerry, who has a healthier family,goes without. This is an example ofa. moral hazard.b. adverse selection.c. signaling.d. screeningarrow_forwardMoral hazard is a costly behavior because the insured party acts riskier than they would normally, knowing that they’re covered, and insurance companies allow it because they can sell more policies in addition to receiving bailouts from the government. It is natural for moral hazard to happen, but its effects can have consequences. This was seen during the 2007–2008 financial crisis on Wall Street that later led to the Great Recession. Because interest rates were at an all-time low, credit was incredibly cheap, and borrowing money was easier than ever. Borrowers rushed to buy homes, including those who could not previously afford it. Money lenders approved loans and sold them to banks, which were marketed and sold as low-risk investments. The loans were then sold to investors who were looking to make an easy profit. The U.S. Federal Reserve then increased interest rates as the economy was recovering, but as a result, the housing market crashed because people were unable to make…arrow_forwardConsider the following steps: 1. Celia chooses how much care, x ∈ [0, 1], to take in programming her robot. This effort costs her x^2/2. 2. Nature chooses whether the robot steps on Peter’s pet salamander, leading to emotional harm to Peter of H > 0 (with probability 1 − x). If the robot does step on the salamander then there is a chance of π that Celia will be identified as the culprit. - If there is no accident (the salamander is not stepped on), then Celia’s payoff is V − x^2/2. Peter and Luke both get zero. - If there is an accident, but Celia is not identified as the culprit, then Celia gets V − x^2/2. Peter gets −H. Luke gets zero. - If there is an accident, and Celia is identified as the culprit, then Luke (the judge) decides a level of compensation D ∈ R+ for Celia to pay Peter. Celia gets V − (x^2)/2−D. Peter gets D−H. Luke gets −(βH−D)^2. h) What would β have to equal, in order for Celia to choose the socially optimal level of x in a Subgame Perfect Equilibrium ? We are…arrow_forward
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