Study Guide for Mankiw's Principles of Microeconomics, 7th
7th Edition
ISBN: 9781285864242
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 22, Problem 2QR
To determine
The problem of adverse selection.
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Briefly explain what is “signaling” (from an economist’s view) and how it may reduce adverse selection.
The problem of adverse selection occurs when there are stronger incentives for “bad” commodities to trade in a market than “good” commodities. In the questions above, the “bad” commodities were high-risk drivers.
Most U.S. states require all drivers to purchase auto insurance. How does an insurance mandate such as this reduce the adverse selection problem?
What is moral hazard?
Chapter 22 Solutions
Study Guide for Mankiw's Principles of Microeconomics, 7th
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- Explain how adverse selection leads to market failure. Give a hypothetical example/situation.arrow_forwardAdverse selection is good ? like the The Affordable Care Act (Obamacare) deals with the problem of adverse selection by using the power of the government to fine individuals who do not sign up for health insurance. do you think it brings benefits or not ?arrow_forwardMy answer is wrong The answer：adverse selection causes an inefficiently large number of transactions to occur. is wrong！！！arrow_forward
- Which of the follow describes the basic problem of Adverse Selection? O It occurs "before the transaction," and is due to a change in behavior of the agent. O It occurs "after the transaction." and is due to inherent unchanging characteristics of the agent. It occurs "after the transaction," and is due to a change in behavior of the agent. It occurs "before the transaction," and is due to inherent unchanging characteristics of the agent.arrow_forwardConsider the model of the market for lemons from Chapter 22. Suppose that there are two types of used cars — good ones and lemons — and that sellers know which type of car they have. Buyers do not know which type of car a seller has. The fraction of used cars of each type is 21 and buyers know this. Let’s suppose that a seller who has a good car values it at $10,000 and a seller with a lemon values the lemon at $5,000. A seller is willing to sell his car for any price greater than or equal to his value for the car; the seller is not willing to sell the car at a price below the value of the car. Buyers’ values for good cars and lemons are $14,000 and $8,000, respectively. As in Chapter 22 we will assume that buyers are risk-neutral; that is, they are willing to pay their expected value of a car. (a) Is there an equilibrium in the used-car market in which all types of cars are sold? Briefly explain.(b) Is there an equilibrium in the used-car market in which only lemons are sold? Briefly…arrow_forwardThe graph illustrates the utility functions for both Rashawn and Juliana, who both have the same amount of wealth. Rashawn Utility a. Who is more risk-averse? Neither Juliana's utility Rashawn's utility $3,000 Initial loss wealth $10,000 gain Stevenson/Wolfers, Principles of Economics, 1e, © 2020 Worth Publishers Wealth Juliana It is impossible to tell, based on the information.arrow_forward
- The idea that ethical judgments are universal was advanced by: a. Kant & Hare b. Dostoyevsky & Kant c. Bentham & Dostoyevsky d. Dostoyevsky & Harearrow_forwardgive an example of an existing economic interaction that exhibits moral hazard. describe the setting and talk about efficiency considerations.arrow_forwardThere is a telling joke about two economists walking down the street. They spot a $20 bill on the sidewalk. One stoops to pick it up, but the other one says, “Don’t bother; if the bill was real, someone would have picked it up already.” The lesson is clear. A strong belief in efficient markets can disable the investor and make it appear that no research effort can be justified. Do you think there are still enough anomalies in the empirical evidence to justify the search for overpriced/underpricedsecurities? Support your answer with examples and new theories in the context of Efficient Market Hypothesis.arrow_forward
- There are two types of people in the economy: low and high risk. Each earns $100. When they are healthy they get to consume the full $100. When they are ill they have to pay $100 of medical costs and have O left for consumption The government is has heard about adverse selection and is considering offering a single insurance plan and making everyone buy it. Using the information in the table below determine what plan the government will offer. The government's insurance plan will require people to pay a premium (tax) of $ when healthy and will give them a benefit of $ when ill. Low Risk High Risk Utility U = Vc U = Vc Percent of Population 70% 30% Risk of illness 10% 50%arrow_forwardAn insurance company is looking to provide a full coverage health insurance plan to the 10 professors in the economics department at the University of Alabama. Seven of these professors are in great health and will incur no medical expenses this year. Six professors have chronic conditions which require $5000 of medical care per year for each professor. a. If the insurance company is looking to insure the entire group, what will be the actuarially fair premium it charges? b. If professors have the option to enroll in the insurance plan, what will be the profit to the insurance company if it charges the premium in part (a)? c. Name the economic phenomenon occurring in this example.arrow_forwardIn the automobile insurance market, adverse selection occurs when Group of answer choices A) drivers with greater risks buy a policy with large deductibles. B) drivers with greater risks buy a policy with no deductibles. C) uninsured drivers drive recklessly. D) insured drivers drive recklessly.arrow_forward
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