Question 1

Expected utility theory predicts that individuals will fully insure in actuarily fair markets so long as their tastes are state-independent.How might adverse selection result in some individuals under-insuring?

Accepted Answer

The answer of Expected utility theory predicts that individuals will...

Question 2

Explain the following statement: "In health insurance markets, moral hazard implies individuals will consume too much health care, whereas adverse selection implies too little health care will be consumed."

Accepted Answer

The answer of Explain the following statement: "In health insurance...

Question 3

Suppose ordinarily half your class would get an A and half would get a B, with A students having a 25% chance of getting an A and B students having a 25% of getting an A.It costs $100 to persuade the instructor to raise a B grade to an A.A student is willing to pay $40 to insure she will get her usual grade and $70 to insure she will get a higher grade than usual.
a.Who would buy insurance and at what price in a competitive equilibrium?
b.Suppose it costs $5 to truthfully signal your type and $10 to falsely signal what type of student you are, and if an insurance company receives no signal, it will interpret this as a signal that you are a B student.What would be the competitive outcome now?
c.Suppose a new teacher comes in -- and this teacher is willing to change a grade for just $60.How does your answer to (a) change?
d.How would your answer to (b) change?
e.Can you change something in the problem that would result in only A-students buying insurance?

Accepted Answer

The answer of Suppose ordinarily half your class would get...

Question 4

Suppose ordinarily half your class would get an A and half would get a B, with A students having a 25% chance of getting an A and B students having a 25% of getting an A.It costs $100 to persuade the instructor to raise a B grade to an A.A student is willing to pay $40 to insure she will get her usual grade and $70 to insure she will get a higher grade than usual.
a.If all students buy insurance that guarantees them an A, what is the zero profit price for an insurance company that offers A insurance.
b.Will grade insurance be sold in equilibrium?
c.Who would buy insurance and at what price if the insurance companies could tell what type of student each student is?
d.Is either the result in (b) or (c) efficient?

Accepted Answer

The answer of Suppose ordinarily half your class would get...

Quiz 22: Asymmetric Information in Competitive Markets

Expected utility theory predicts that individuals will fully insure in actuarily fair markets so long as their tastes are state-independent.How might adverse selection result in some individuals under-insuring?

Explain the following statement: "In health insurance markets, moral hazard implies individuals will consume too much health care, whereas adverse selection implies too little health care will be consumed."