George 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. screening

George 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. screening

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter20: The Problem Of Adverse Selection Moral Hazard

Section: Chapter Questions

Problem 20.2IP

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Can you answer these three parts please? I am super confused. Thank you :) Part A. Austin pays $10,500 per year to an insurance company in return for its promise to pay part of his family's medical bills. Austin must pay the first $1,000 on his own before the insurance kicks in. The $1,000 is Austin's: a. risk b. deductible c. premium d. expected utility Part B: Suppose Austin earns $100,000 if he is healthy, and _____ if he falls ill. Suppose further that he has a __% chance of falling ill. If Austin were to purchase full insurance, the payout would be equal to $20,000. The actuarially fair premium for this payout would be equal to $400. a. $80,000; 2% b. $120,000; 2% c. $80,000; 0.4% d. $100,000; 20% e. $120,000; 0.4% Part c: suppose Austin (who is now your employer) offers a new health insurance benefit that covers orthodontics (things like braces, invisaline) for employees and their family members. Suppose further that you are aware…
Consider 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…
Consider the following steps Celia chooses how much care, x ∈ [0,1], to take in programming her robot. This effort costs her x^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 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 Like (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. f) Now we turn to social otimality rather than equilibrium. Consider the value judgement that the optimal level of care is…
Consider the following steps Celia chooses how much care, x ∈ [0,1], to take in programming her robot. This effort costs her x^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 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 Like (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. A) Draw a game tree to represent this model.
Consider the following steps Celia chooses how much care, x ∈ [0,1], to take in programming her robot. This effort costs her x^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 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 Like (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 ?…
Consider the following steps Celia chooses how much care, x ∈ [0,1], to take in programming her robot. This effort costs her x^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 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 Like (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. b) Write down Celia's expected payoff when she chooses x in step 1.
Dr. Wexler displays her medical degree in her officewaiting room, hoping patients will be impressed thatshe attended a prestigious medical school. This isan example ofa. moral hazard.b. adverse selection.c. signaling.d. screening.
Scenario 2 Tess and Lex earn $40,000 per year and all earnings are spent on consumption (c). Tess and Lex both have the utility function (sqrt c) . Both could experience an adverse event that results in earnings of $0 per year. Tess has a 1% chance of experiencing an adverse event and Lex has a 12% chance of experiencing an adverse event. Tess and Lex are both aware of their risk of an adverse event. Refer to Scenario 2 If an insurance company knows the probability of Tess experiencing an adverse event, what is the actuarially fair premium charged to Tess per $1 of benefit? Round to two decimal places
Scenario 2 Tess and Lex earn $40,000 per year and all earnings are spent on consumption (c). Tess and Lex both have the utility function (sqrt c) . Both could experience an adverse event that results in earnings of $0 per year. Tess has a 1% chance of experiencing an adverse event and Lex has a 12% chance of experiencing an adverse event. Tess and Lex are both aware of their risk of an adverse event. Refer to Scenario 2 Suppose that insurance companies do not know specific probabilities of adverse events for Tess or Lex, but do know the average probability of an adverse event. If they assumed that both Tess and Lex purchase full insurance, what is the actuarially fair premium charged? Round to two decimal places
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
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.
Define the difference between moral hazard and adverse selection using an example. .