Chapter 19
Which of the following is an example of adverse selection? A safe driver taking greater risk in a rental car than his own car. A terminally ill person purchasing life insurance. An employment contract encourages little effort on the part of employees. All of the above
A terminally ill person purchasing life insurance.
To signal to your insurance company that you are a low risk individual, you should
Accept an insurance policy with a high deductible
Adverse selection happens because a. One of the parties has more information about itself then the other party b. Individuals that the principle want to least select are the ones more likely to apply c. Parties most likely to accept an offer would be least qualified d. All of the above
All of the above
Trades between risk lovers and risk takers a. Move assets to lower-value use b. Move assets to higher value use c. Create wealth d. Both B&C
Both B & C
Individuals who are more risk averse
buy more insurance
Ideally, insurance companies would like to charge
High premium to high risk and low premium to low risk clients
One of the solutions to the adverse selection problem in insurance is
Is to require everyone to buy insurance
Which is a screen against adverse selection
Prospective secretaries must take a typing test before being hired
Both Nadia and Samantha are applying to insure their car against theft. Nadia lives in a secure neighborhood, where the probability of theft is 10%. Samantha lives in a lesser secure neighborhood where the probability of theft is 25%. Both Nadia and Samantha own cars worth $10,000, and are willing to pay $100 over expected loss for insurance. Suppose the insurance company cannot tell them apart but expects them to be different values and charges them an average premium of $1850. Who is more likely to buy this insurance?
Samantha
Sally would only agree to a second date with Andy if she sees him leave a generous tip for the waiter on their first dinner date. This is an example of a
Screening Mechanism
Adverse selection in insurance requires that
potential customers face different levels of risk
Someone who values a lottery at more than the expected value is
risk lover
A risk averse individual
values a lottery at less than its expected value
Adverse selection is
when people at a greater risk want to be insured more
Scatterbrain Samantha often forgets to lock her house. This has caused the probability of a burglary to be 30%. If her house gets broken into, she faces a property loss of $10,000, otherwise she gets to keep her $100,000. If Samantha is offered an insurance policy for her house to protect her from loss at $3,000, what is her expected wealth?
$97,000
Wearing an expensive business suit to an interview is a kind of
Signaling mechanism
Both Nadia and Samantha are applying to insure their car against theft. Nadia lives in a secure neighborhood, where the probability of theft is 10%. Samantha lives in a lesser secure neighborhood where the probability of theft is 25%. Both Nadia and Samantha own cars worth $10,000, and are willing to pay $100 over expected loss for insurance. How much would Nadia be willing to pay for the insurance?
$1100
Scatterbrain Samantha often forgets to lock her house. This has caused the probability of a burglary to be 30%. If her house gets broken into, she faces a property loss of $10,000, otherwise she gets to keep her $100,000. What is the minimum price an insurance company could offer (if it had no other costs)?
$3,000
An insurance company offers doctors malpractice insurance. Assume that malpractice claims against careful doctors cost $5,000 on average over the term of the policy and settling malpractice claims against reckless doctors costs $30,000. Doctors are risk-neutral and know whether they are reckless or careful, but the insurance company only knows that 10% of doctors are reckless. How much do insurance companies have to charge for malpractice insurance to break even?
$30,000
Scatterbrain Samantha often forgets to lock her house. This has caused the probability of a burglary to be 30%. If her house gets broken into, she faces a property loss of $10,000, otherwise she gets to keep her $100,000. What is her expected loss?
$3000
Scatterbrain Samantha often forgets to lock her house. This has caused the probability of a burglary to be 30%. If her house gets broken into, she faces a property loss of $10,000, otherwise she gets to keep her $100,000. What is her expected wealth?
$97000
Screening is
actions by the uninformed party to uncover the true risks
An indication that Insurance companies anticipate adverse selection is
c. they classify clients into different risk types according to their claim history
The "lemons" problem is that
cars of unverifiable high quality are withheld from the used car market
