Principles of Microeconomics (MindTap Course List)
8th Edition
ISBN: 9781305971493
Author: N. Gregory Mankiw
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Concept explainers
Question
Chapter 22, Problem 2CQQ
To determine
The example of moral hazard.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
George has a life insurance policy that pays hisfamily $1 million if he dies. As a result, he doesnot hesitate to enjoy his favorite hobby of bungeejumping. This is an example ofa. moral hazard.b. adverse selection.c. signaling.d. screening
Suppose an individual saves as precaution against adverse events, like unemployment. This is an example of
a-adverse selection
b-self-insurance
c-adverse saving
d-moral hazard
In the summer of 1984, Nicholai opened a
small art gallery in the West Village and
amassed a collection worth $2,60,000. An
insurance company figured there was a 5%
chance the collection would be destroyed and
worth $0. Nicholai has utility u(x) = x0.5. If
Nicholai purchases full insurance at a fair
price, his expected utility would be ___.
while if he declines the insurance he would
face an expected utility of
а. 1,487.5; 1,531.8
b. 1,487.5; 1,444.9
с. 1,571.6;B 1,531.8
d. 1,571.6; 1,444.9
Chapter 22 Solutions
Principles of Microeconomics (MindTap Course List)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Similar questions
- It was felt that liability insurance would undermine the tort system, which has as its central theorem the concept that the individual responsible for injuring another should be made to pay for that injury. Do you think the existence of liability insurance causes one to be less careful than he or she might otherwise be?arrow_forwardIf people get higher pay from insurance than their pre premiums. Will this increase or decrease the death rate of average persons? Is this an example of moral hazard or adverse selection? How will an insurance company deal with these problems.arrow_forwardIf people get higher pay from their insurance than their premiums, will this increase or decrease the death rate of average person? Is this example of moral hazard or adverse selection? How will the insurance company deal with this problem ?arrow_forward
- If you sell your DVD player on eBay you will be better informed about the quality of the product than any potential buyer. This is called A) adverse selection. B) asymmetric information. C) moral hazard. D) opportunistic behavior.arrow_forwardWhat are adverse selection and moral hazard?arrow_forwardAn 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.arrow_forward
- Why do economists say that people tend to be risk-averse?arrow_forwardJohn wants to buy a used car. He knows that there are two types of car in the market, plums and lemons. Lemons are worse quality cars and are more likely to break down than plums. John is willing to pay £10, 000 for a plum and £2, 000 for a lemon. Unfortunately, however, he cannot distinguish between the two types. Sellers can offer a warranty that would cover the full cost of any repair needed by the car for y ∗ years. Considering the type and likelihood of problems their cars can have, owners of plums estimate that y years of guarantee would cost them 1000y, owners of lemons estimate that the cost would be 2000y. John knows these estimates and decides to offer £10, 000 if a car comes with y ∗ years of warranty, £2, 000 if a car comes without warranty. For which values of y ∗ is there a separating equilibrium where only owners of plums are willing to offer the y ∗ -years warranty? Clearly explain your reasoning.arrow_forwardHow might adverse selection make it difficult for an insurance market to operate?arrow_forward
- It was taught that liability insurance would undermine the tort system, which has as its central theorem the concept that the individual responsible for injuring another should be made to pay for that injury. Do you think the existence of liability insurance causes one to be less careful than he or she might otherwise be?arrow_forwardHow can deductibles, copayments, and coinsurance reduce moral hazard?arrow_forwardThe lecture mentions that diminishing marginal utility applies to the consumption of money as well as the consumption of certain food. Can you give another example where diminishing marginal utility applies? Can you think of any example where diminishing marginal utility does not apply? From utility theory, the demand for insurance depends on the level of risk aversion (i.e. how much you hate uncertainty), the cost of insurance (i.e. if it is within your willingness to pay), as well as wealth. Can you think of anything else that affects demand for insurance? One of the predictions of prospect theory is that we tend to be overly concerned with relatively small risk. Can you think of any example (besides those given in the lecture) that either speaks to this or is an exception?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Principles of Economics (12th Edition)EconomicsISBN:9780134078779Author:Karl E. Case, Ray C. Fair, Sharon E. OsterPublisher:PEARSON
Engineering Economy (17th Edition)EconomicsISBN:9780134870069Author:William G. Sullivan, Elin M. Wicks, C. Patrick KoellingPublisher:PEARSON
Principles of Economics (MindTap Course List)EconomicsISBN:9781305585126Author:N. Gregory MankiwPublisher:Cengage Learning
Managerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-...EconomicsISBN:9781259290619Author:Michael Baye, Jeff PrincePublisher:McGraw-Hill Education
Principles of Economics (12th Edition)
Economics
ISBN:9780134078779
Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:9780134870069
Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-...
Economics
ISBN:9781259290619
Author:Michael Baye, Jeff Prince
Publisher:McGraw-Hill Education