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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

The ability of insurance to spread risk is limited by

a. risk aversion and moral hazard.

b. risk aversion and adverse selection.

c. moral hazard and adverse selection.

d. risk aversion only.

To determine

Moral hazard and adverse selection.

Explanation

Option (b):

The risk-averse people would be very careful, so that they would not require any insurance. People may hide the important information to the insurance company, which results in more chances that the insurance company bears the cost. Thus, the option “b” is correct.

Option (a):

Moral hazard problem is the change in the behavior of people who bought the insurance. This would not restrict the diversification of risk. Thus, option ‘a’ is incorrect...

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