Example of adverse selection.

Question

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Answer 1

Question

Chapter 22, Problem 1CQQ

To determine

Example of adverse selection.

Expert Solution & Answer

Answer to Problem 1CQQ

Option ‘b’ is the correct answer.

Explanation of Solution

Option (b):

Elaine, the buyer of health insurance knows more about her own health problems than the insurance company. The price of health insurance reflects the costs of an unhealthier person than an average person. So, Jerry who is healthy may observe the high price of insurance and decide not to buy it. Thus, option ‘b’ is correct.

Option (a):

Inspite of getting a health insurance, Elaine is not imperiling herself to illness. Hence, option ‘a’ is incorrect.

Option (c):

Health insurance does not signal the health issues of a person. Hence, option ‘c’ is incorrect.

Option (d):

The insurance company is not asking the parties for their health information. Hence, option ‘d’ is incorrect.

Economics Concept Introduction

Concept introduction:

Adverse selection: Adverse selection refers to a situation where there is a lack of information existing in the market before the economic transaction takes place, thereby resulting in an undesired outcome.

Moral hazard: Moral hazard refers to changes in the behavior of people after they have entered into a transaction that makes the other party in the transaction worse off.

Signaling: Signaling is an action taken by an informed party to reveal private information to an uninformed party.

Screening: Screening refers to the action of one party in the process of finding the required skill and information of other party.

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2. a) Consider a market where one firm (firm 1) currently produces, but a second firm (firm 2) is intending to enter and sell an identical product. The market has inverse demand given by p = 40 – Q, where Q is the total output sold in the market. Firm 1 has a marginal cost of 16 and firm 2 has a marginal cost of c < 16, with no fixed cost for either firm. Firm 2 has a choice of competing on price or quantity, with firms making their choices simultaneously (i.e. the market will be either a Bertrand or Cournot duopoly). If you were advising firm 2 on entering this market, how would you advise it to compete? To what extent would the size of firm 2’s cost advantage affect your advice? b) Now assume that firm 2 is aware that other firms are considering entering the market, so the market may over time change from a duopoly to an oligopoly with more than two firms. This would not change the nature of competition (i.e. any additional firms would set price or quantity in line with the first…

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Answer 2

Question

Chapter 22, Problem 1CQQ

To determine

Example of adverse selection.

Expert Solution & Answer

Answer to Problem 1CQQ

Option ‘b’ is the correct answer.

Explanation of Solution

Option (b):

Elaine, the buyer of health insurance knows more about her own health problems than the insurance company. The price of health insurance reflects the costs of an unhealthier person than an average person. So, Jerry who is healthy may observe the high price of insurance and decide not to buy it. Thus, option ‘b’ is correct.

Option (a):

Inspite of getting a health insurance, Elaine is not imperiling herself to illness. Hence, option ‘a’ is incorrect.

Option (c):

Health insurance does not signal the health issues of a person. Hence, option ‘c’ is incorrect.

Option (d):

The insurance company is not asking the parties for their health information. Hence, option ‘d’ is incorrect.

Economics Concept Introduction

Concept introduction:

Adverse selection: Adverse selection refers to a situation where there is a lack of information existing in the market before the economic transaction takes place, thereby resulting in an undesired outcome.

Moral hazard: Moral hazard refers to changes in the behavior of people after they have entered into a transaction that makes the other party in the transaction worse off.

Signaling: Signaling is an action taken by an informed party to reveal private information to an uninformed party.

Screening: Screening refers to the action of one party in the process of finding the required skill and information of other party.

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Answer 3

Question

Chapter 22, Problem 1CQQ

To determine

Example of adverse selection.

Expert Solution & Answer

Answer to Problem 1CQQ

Option ‘b’ is the correct answer.

Explanation of Solution

Option (b):

Elaine, the buyer of health insurance knows more about her own health problems than the insurance company. The price of health insurance reflects the costs of an unhealthier person than an average person. So, Jerry who is healthy may observe the high price of insurance and decide not to buy it. Thus, option ‘b’ is correct.

Option (a):

Inspite of getting a health insurance, Elaine is not imperiling herself to illness. Hence, option ‘a’ is incorrect.

Option (c):

Health insurance does not signal the health issues of a person. Hence, option ‘c’ is incorrect.

Option (d):

The insurance company is not asking the parties for their health information. Hence, option ‘d’ is incorrect.

Economics Concept Introduction

Concept introduction:

Adverse selection: Adverse selection refers to a situation where there is a lack of information existing in the market before the economic transaction takes place, thereby resulting in an undesired outcome.

Moral hazard: Moral hazard refers to changes in the behavior of people after they have entered into a transaction that makes the other party in the transaction worse off.

Signaling: Signaling is an action taken by an informed party to reveal private information to an uninformed party.

Screening: Screening refers to the action of one party in the process of finding the required skill and information of other party.

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 4

Question

Chapter 22, Problem 1CQQ

To determine

Example of adverse selection.

Expert Solution & Answer

Answer to Problem 1CQQ

Option ‘b’ is the correct answer.

Explanation of Solution

Option (b):

Elaine, the buyer of health insurance knows more about her own health problems than the insurance company. The price of health insurance reflects the costs of an unhealthier person than an average person. So, Jerry who is healthy may observe the high price of insurance and decide not to buy it. Thus, option ‘b’ is correct.

Option (a):

Inspite of getting a health insurance, Elaine is not imperiling herself to illness. Hence, option ‘a’ is incorrect.

Option (c):

Health insurance does not signal the health issues of a person. Hence, option ‘c’ is incorrect.

Option (d):

The insurance company is not asking the parties for their health information. Hence, option ‘d’ is incorrect.

Economics Concept Introduction

Concept introduction:

Adverse selection: Adverse selection refers to a situation where there is a lack of information existing in the market before the economic transaction takes place, thereby resulting in an undesired outcome.

Moral hazard: Moral hazard refers to changes in the behavior of people after they have entered into a transaction that makes the other party in the transaction worse off.

Signaling: Signaling is an action taken by an informed party to reveal private information to an uninformed party.

Screening: Screening refers to the action of one party in the process of finding the required skill and information of other party.

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Answer 5

Chapter 22, Problem 1CQQ

To determine

Example of adverse selection.

Expert Solution & Answer

Answer to Problem 1CQQ

Option ‘b’ is the correct answer.

Explanation of Solution

Option (b):

Elaine, the buyer of health insurance knows more about her own health problems than the insurance company. The price of health insurance reflects the costs of an unhealthier person than an average person. So, Jerry who is healthy may observe the high price of insurance and decide not to buy it. Thus, option ‘b’ is correct.

Option (a):

Inspite of getting a health insurance, Elaine is not imperiling herself to illness. Hence, option ‘a’ is incorrect.

Option (c):

Health insurance does not signal the health issues of a person. Hence, option ‘c’ is incorrect.

Option (d):

The insurance company is not asking the parties for their health information. Hence, option ‘d’ is incorrect.

Economics Concept Introduction

Concept introduction:

Adverse selection: Adverse selection refers to a situation where there is a lack of information existing in the market before the economic transaction takes place, thereby resulting in an undesired outcome.

Moral hazard: Moral hazard refers to changes in the behavior of people after they have entered into a transaction that makes the other party in the transaction worse off.

Signaling: Signaling is an action taken by an informed party to reveal private information to an uninformed party.

Screening: Screening refers to the action of one party in the process of finding the required skill and information of other party.

Answer 6

Chapter 22, Problem 1CQQ

To determine

Example of adverse selection.

Expert Solution & Answer

Answer to Problem 1CQQ

Option ‘b’ is the correct answer.

Explanation of Solution

Option (b):

Elaine, the buyer of health insurance knows more about her own health problems than the insurance company. The price of health insurance reflects the costs of an unhealthier person than an average person. So, Jerry who is healthy may observe the high price of insurance and decide not to buy it. Thus, option ‘b’ is correct.

Option (a):

Inspite of getting a health insurance, Elaine is not imperiling herself to illness. Hence, option ‘a’ is incorrect.

Option (c):

Health insurance does not signal the health issues of a person. Hence, option ‘c’ is incorrect.

Option (d):

The insurance company is not asking the parties for their health information. Hence, option ‘d’ is incorrect.

Economics Concept Introduction

Concept introduction:

Adverse selection: Adverse selection refers to a situation where there is a lack of information existing in the market before the economic transaction takes place, thereby resulting in an undesired outcome.

Moral hazard: Moral hazard refers to changes in the behavior of people after they have entered into a transaction that makes the other party in the transaction worse off.

Signaling: Signaling is an action taken by an informed party to reveal private information to an uninformed party.

Screening: Screening refers to the action of one party in the process of finding the required skill and information of other party.

Answer 7

Chapter 22, Problem 1CQQ

To determine

Example of adverse selection.

Answer 8

Expert Solution & Answer

Answer to Problem 1CQQ

Option ‘b’ is the correct answer.

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

Explanation of Solution

Option (b):

Elaine, the buyer of health insurance knows more about her own health problems than the insurance company. The price of health insurance reflects the costs of an unhealthier person than an average person. So, Jerry who is healthy may observe the high price of insurance and decide not to buy it. Thus, option ‘b’ is correct.

Option (a):

Inspite of getting a health insurance, Elaine is not imperiling herself to illness. Hence, option ‘a’ is incorrect.

Option (c):

Health insurance does not signal the health issues of a person. Hence, option ‘c’ is incorrect.

Option (d):

The insurance company is not asking the parties for their health information. Hence, option ‘d’ is incorrect.

Answer 12

Economics Concept Introduction

Concept introduction:

Adverse selection: Adverse selection refers to a situation where there is a lack of information existing in the market before the economic transaction takes place, thereby resulting in an undesired outcome.

Moral hazard: Moral hazard refers to changes in the behavior of people after they have entered into a transaction that makes the other party in the transaction worse off.

Signaling: Signaling is an action taken by an informed party to reveal private information to an uninformed party.

Screening: Screening refers to the action of one party in the process of finding the required skill and information of other party.

Answer 13

Ch. 22.1 - Prob. 1QQ Ch. 22.2 - Prob. 2QQ Ch. 22.3 - Prob. 3QQ Ch. 22 - Prob. 1CQQ Ch. 22 - Prob. 2CQQ Ch. 22 - Prob. 3CQQ Ch. 22 - Prob. 4CQQ Ch. 22 - Prob. 5CQQ Ch. 22 - Prob. 6CQQ Ch. 22 - Prob. 1QR

Example of adverse selection.

Example of adverse selection.

Answer to Problem 1CQQ

Explanation of Solution

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Chapter 22 Solutions