ur 1. (a) Explain the difference between adverse selection and moral hazard.(b) How can adverse selection be dealt with? Would the involvement of the government in, say, a health-insurance market suffering from adverse selection problems rectify the situation, or would it create moreproblems?(b) Examine the table below. The insurance company does not know the probabilities of falling sick for eachindividual.Probability of falling sick0.20Insurance BuyerLost income if sick (Tk.)15,000AВ0.1525,00015,00030,00025,00015,000C0.10D0.10E0.05F0.15(i) If the company charged everybody a premium of Tk.3,000, who would stay and who would leave theinsurance market? Say why.(ii) If the company charged everybody a premium equal to the average of the actuarially fair premiums forall, who would stay and who would leave the insurance market? Say why.6-

Economics is a branch of social science that describes and analyzes the behaviours and decisions…

1. (a) Explain the difference between adverse selection and moral hazard. (b) How can adverse selection be dealt with? Would the involvement of the government in, say, a health- insurance market suffering from adverse selection problems rectify the situation, or would it create more problems?

1. (a) Explain the difference between adverse selection and moral hazard. (b) How can adverse selection be dealt with? Would the involvement of the government in, say, a health- insurance market suffering from adverse selection problems rectify the situation, or would it create more problems?

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

Chapter19: The Problem Of Adverse Selection

Section: Chapter Questions

Problem 7MC

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Question

1. (a) Explain the difference between adverse selection and moral hazard.
(b) How can adverse selection be dealt with? Would the involvement of the government in, say, a health-
insurance market suffering from adverse selection problems rectify the situation, or would it create more
problems?
(b) Examine the table below. The insurance company does not know the probabilities of falling sick for each
individual.
Probability of falling sick
0.20
Insurance Buyer
Lost income if sick (Tk.)
15,000
A
В
0.15
25,000
15,000
30,000
25,000
15,000
C
0.10
D
0.10
E
0.05
F
0.15
(i) If the company charged everybody a premium of Tk.3,000, who would stay and who would leave the
insurance market? Say why.
(ii) If the company charged everybody a premium equal to the average of the actuarially fair premiums for
all, who would stay and who would leave the insurance market? Say why.
6-

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How might adverse selection make it difficult for an insurance market to operate?
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V1
1. Suppose a person's utility is equal to U = Y and the initial income is $80,000. Medical expenses for a sick person amount to $40,000 and the probability of getting sick is 25%. Assume that the individual is required to pay the actuarially fair premium (r = p * M). a. b. What is the expected income when you are healthy? When you are sick? What is the expected utility if you buy insurance? What is the expected utility without insurance? C. What is the actuarially fair premium for the individual? d. Graph the individual's utility function. Clearly indicate the expected disposable income, utility with insurance, and expected utility without insurance. What is the dollar value of the individual's risk premium? Show this on the graph. How much is the individual willing to pay for insurance? e. f.
Please Solve i give upvote
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ease use utility of wealth function in the booK, 8-1 (see below). Certainty Utility B D 200 198 194 D' Total utility 170 of wealth C' Expected Utility A 140 10,000 15,000 19,000 20,000 Wealth FIGURE 8-1 Total Utility of Wealth and the Impact of Insurance Please explain the difference between the certainty utility line and the expected utility line b. Calculate your E(U), given an 80% change of being healthy and 20% of being sick, knowing that your income falls to $10,000 and your utility is 140 if you get sick. Calculate your E(W), given an 80% change of being healthy and 20% of being sick. d. Given that your Certainty Utility Function is U = 200Y-0.00154 and Y is your income, what is your Certainty Utility with insurance (if you are risk averse) What insurance premium will you pay to guarantee a utility of 197? Please provide a calculation.
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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.
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