EBK MANAGERIAL ECONOMICS
4th Edition
ISBN: 9781305483170
Author: FROEB
Publisher: YUZU
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Chapter 19, Problem 10MC
To determine
Adverse selection.
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What are some strategies for reducing adverse selection in insurance markets? What sorts of problems do these solutions cause?
What are adverse selection and moral hazard?
19-3. You sell bicycle theft insurance. If bicycle owners do not know whether they are high or low risk consumers. there an adverse selection problem?
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- How might adverse selection make it difficult for an insurance market to operate?arrow_forwardAdverse selection occurs because of A) spreading of risks. B) diminishing marginal utility. C) of imperfect information. D) moral hazardarrow_forwardhow would the adverse selection problem arise in the insurance market? How is it like the lemon used car problem?arrow_forward
- Name two solutions to adverse selection in insurance and explain how they work.arrow_forwardWhich of the following is an example of moral hazard? Group of answer choices A. Reckless drivers are the ones most likely to buy automobile insurance. b. Retail stores located in high-crime areas tend to buy theft insurance more often than stores located in low-crime areas. C. Drivers who have many accidents prefer to buy cars with air bags. D. Employees recently covered by the company health plan start going to the doctor every time they get a cold. E. Company divisions try to improve profitability at each other's expense.arrow_forwardSomeone indicated that employee’s absence from work despite meeting the eight hours per day requirement affect productivity and increase cost of business. If an employee makes up the hours by coming early and leaving late, how can you call it an example of moral hazard when the manager can easily correct this behavior? Please explain to the class.arrow_forward
- Explain how adverse selection leads to market failure. Give a hypothetical example/situation.arrow_forwardAn insurance company offered drivers auto insurance. Assume that claims by safe drivers cost the insurer $1,000 over the term of the policy and claims by reckless drivers costs $5,000. Drivers know whether they are safe or reckless, but the insurer only know that 10% of drivers are reckless. a. What is the expected cost of losses to the insurance company? b. How much does the insurance company have to charge for auto insurance to break-even? Why? I found answer for part a. but I didn't find any answer for part b. Could you please post answer for part b. Please don't repeat answer from old post. I just need answer for part b. Thank youarrow_forwardThe government can help solve the problem of adverse selection in each of these ways EXCEPT: a. reducing the need for insurance. b. requiring that everyone buy insurance. c. providing incentives for buyers to reveal private information. d. providing insurance.arrow_forward
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