6. Insurance markets are often plagued by problems of asymmetric information. In
ID: 1107263 • Letter: 6
Question
6. Insurance markets are often plagued by problems of asymmetric information. In part, this is because insurance markets themselves exist only because of incomplete information—nobody knows what the future holds, so households pay insurance companies to bear the risk of an uncertain future. Both households and insurance companies have incomplete information, but problems arise because the information is asymmetrically incomplete.Consider the market for medical insurance. What information might buyers in this market have that insurance companies don't have? Here's a harder questions: What information might sellers of medical insurance have that buyers do not have? Buyers have information about their medical history, while sellers of medical insurance have more information about laws related to medical insurance. Buyers have information about their medical history, while sellers of medical insurance have more information about your family's medical history. Buyers have information about medical insurance laws, while sellers of medical insurance have more information about patients' medical histories. Buyers have information about medical insurance laws, while sellers of medical insurance have more information about doctor quality. Price 300 $250 $200 $150 $100 MC S50.. 6 Quantity
Explanation / Answer
6. Buyers have information about their medical history, while sellers of medical insurance have more information about laws related to medical insurance
In this case, the buyers have information about their medical history, while sellers of medical insurance have more information about laws related to medical insurance.
Thus there are chances of an adverse selection of a consumer who is hiding information about his actual medical conditions and the insurer has better information regarding the laws and reguations of insurance which might result in adverse selection of the policy on the part of the consumer
7.Physicians know more about their patient's medical history than their patients.
This leads to supplier induced demand because the patient believes that he is less equipped to know about his medical conditions (lack of infirmation) and trusts the physician's knowledge and expertise in the field. This he is influenced by whtever the physician suggets.
8.very unlikely, adverse selection.
Adverse selection occurs when there is a ack of information prior towhen the deal takes place. In the above case the buyer has asymmetric information about the actual condition of the amplifier and therefore would be skeptical in buying it for a small discount of 10%.
9.Life insurance companies fear a moral hazard problem.
This is because there is a fear that people might use insurance policy for making a profit out of it. Without an exclusion policy, death rates would increase due to moral hazard.
10. The patient would take 4 appointments without insurance and 5 with insurance.
This result can be obtained at the points where the demand curves are intersecting the marginal cost curve which denotes the supply curve of medical facilities.
11. $400 without insurance, $250 with insurance, $250 paid by the insurance company.
This can be concluded because
total appointments= 4 cost of each appointment = $100 (MC) therefore total expenditure = 4*00 = $400
With insurance (50% cost borne by insurance company)
total apoointments = 5 cost of each appointment = $100 , therefore total expenditure = 5*100= $ 500
However, the insurance company will bear 50% of the total cost and therefore payt half of $500 i.e. $250 and the rest of it is paid by the patient.
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