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Adverse selection occurs because of
- A) spreading of risks. B) diminishing
marginal utility .
C) of imperfect information. D) moral hazard
Step by step
Solved in 2 steps
- A government policy aimed at protecting people against the risk of adverse events is calledIf 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.Adverse Selection refers to a situation in insurance markets in which individuals change their behavior after obtaining coverage, resulting in increased insurance costs True or False
- Moral hazard is a problem that arises when which situation occurs? There is a risk of a "lemon." There is a misunderstanding rising from differences of opinion. There is a hidden characteristic. There is a risk of inappropriate behaviour by one of the parties to a transaction or agreement.Insurance coverage has been shown to diminish the importance of time in the decision about how much medical care to seek and which providers to use. True OR FalseDistinguish between adverse selection and moral hazard as they relate to the insurance industry.
- A side effect of an action that adversely affects is third party is called aHow might adverse selection make it difficult for an insurance market to operate?20-1 Your product fail about 2% of the time, on average. Some customers purchase the extended warranty you offer in which you will replace the product if it fails. Would you want to price warranty at 2% of the product price? Discuss both moral hazard and adverse selection issues.
- An advertisement in the local paper offers a "fully loaded" car that is only six months old and has only been driven 5,000 miles at a price that is 20 percent lower than the average selling price of a brand new car with the same options. This low price is likely indicative of what type of situation? a) Adverse selection b)Moral hazard c) Winner's curse d) Perfect informationWhat are adverse selection and moral hazard?20-2 A collogue tells you that he can get a business loan from the bank, but he rates seem very high for what our collogue considers a low risk loan. Give an adverse selection explanation for this, and offer advice to your friend on how to solve the problem. Give moral hazard explanation for this, and offer advice to your friend on how to solve the problem.