EBK PRINCIPLES OF MICROECONOMICS
8th Edition
ISBN: 8220103612159
Author: Mankiw
Publisher: Cengage Learning US
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Chapter 22, Problem 2CQQ
To determine
The example of moral hazard.
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Adverse selection occurs because of
A) spreading of risks. B) diminishing marginal utility.
C) of imperfect information. D) moral hazard
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
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
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- In the summer of 1984, Nicholai opened a small art gallery in the West Village and amassed a collection worth $2,60,000. An insurance company figured there was a 5% chance the collection would be destroyed and worth $0. Nicholai has utility u(x) = x0.5. If Nicholai purchases full insurance at a fair price, his expected utility would be ___. while if he declines the insurance he would face an expected utility of а. 1,487.5; 1,531.8 b. 1,487.5; 1,444.9 с. 1,571.6;B 1,531.8 d. 1,571.6; 1,444.9arrow_forwardIt was felt that liability insurance would undermine the tort system, which has as its central theorem the concept that the individual responsible for injuring another should be made to pay for that injury. Do you think the existence of liability insurance causes one to be less careful than he or she might otherwise be?arrow_forwardIf 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.arrow_forward
- 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 ?arrow_forwardIf you sell your DVD player on eBay you will be better informed about the quality of the product than any potential buyer. This is called A) adverse selection. B) asymmetric information. C) moral hazard. D) opportunistic behavior.arrow_forwardWhat are adverse selection and moral hazard?arrow_forward
- An individual has 40,000 in income per year. The person will get sick with probability 0.1. If he does get sick, the medical bills will total 30,000. The following tables shows the utility derived from certain amounts of income: Income Utility 40,000 200 |37,000 195 35,000 190 30,000 170 |20,000 140 10.000 100 A. Is this person risk neutral, risk loving or risk averse? Why? B. Considering the probability of illness, what is the expected income without insurance? Show your work.arrow_forwardWhy do economists say that people tend to be risk-averse?arrow_forwardIt was taught that liability insurance would undermine the tort system, which has as its central theorem the concept that the individual responsible for injuring another should be made to pay for that injury. Do you think the existence of liability insurance causes one to be less careful than he or she might otherwise be?arrow_forward
- John wants to buy a used car. He knows that there are two types of car in the market, plums and lemons. Lemons are worse quality cars and are more likely to break down than plums. John is willing to pay £10, 000 for a plum and £2, 000 for a lemon. Unfortunately, however, he cannot distinguish between the two types. Sellers can offer a warranty that would cover the full cost of any repair needed by the car for y ∗ years. Considering the type and likelihood of problems their cars can have, owners of plums estimate that y years of guarantee would cost them 1000y, owners of lemons estimate that the cost would be 2000y. John knows these estimates and decides to offer £10, 000 if a car comes with y ∗ years of warranty, £2, 000 if a car comes without warranty. For which values of y ∗ is there a separating equilibrium where only owners of plums are willing to offer the y ∗ -years warranty? Clearly explain your reasoning.arrow_forwardHow might adverse selection make it difficult for an insurance market to operate?arrow_forwardHow can deductibles, copayments, and coinsurance reduce moral hazard?arrow_forward
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