Consumer Choice · What is the consumers budget constraint? · How does a consumer

Question

Consumer Choice

· What is the consumers budget constraint?

· How does a consumer choose how much of different goods to consume?

· What are the income and substitution effects?

· How does the demand curve relate to the consumer choice problem?

· How does the consumer choice problem relate to labor supply and borrowing/lending behavior?

Asymmetric Information and Healthcare

· What is moral hazard?

· What is adverse selection?

· How do these two concepts relate to the market for insurance and healthcare?

· How do insurance companies try to deal with adverse selection and moral hazard?

Explanation / Answer

1.A budget constraint represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income.

2. the theory of consumer choice relates preferences (for the consumption of both goods and services) to consumption expenditures; ultimately, this relationship between preferences and consumption expenditures is used to relate preferences to consumer demand curves.Preferences are the desires by each individual for the consumption of goods and services that translate into choices based on income or wealth for purchases of goods and services to be combined with the consumer's time to define consumption activities. Consumption is separated from production, logically, because two different consumers are involved. In the first case consumption is by the primary individual; in the second case, a producer might make something that he would not consume himself. Therefore, different motivations and abilities are involved.

3.The demand curve that make up consumer theory are used to represent prospectively observable demand patterns for an individual buyer on the hypothesis of constrained optimization. Prominent variables used to explain the rate at which the good is purchased (demanded) are the price per unit of that good, prices of related goods, and wealth of the consumer.

4. normally on the basis of individual's choice of purchasing good labor forces are driven.in demanding situation labor forces are needed in high quantum and that would inadvertly effect the borrowing lending process

5. a moral hazard is a situation where a party will have a tendency to take risks because the costs that could incur will not be felt by the party taking the risk. In other words, it is a tendency to be more willing to take a risk, knowing that the potential costs or burdens of taking such risk will be borne, in whole or in part, by others. A moral hazard may occur where the actions of one party may change to the detriment of another after a financial transaction has taken place.

6.It refers to a market process in which undesired results occur when buyers and sellers have asymmetric information (access to different information); the "bad" products or services are more likely to be selected. For example, a bank that sets one price for all of its chequing account customers runs the risk of being adversely selected against by its low-balance, high-activity (and hence least profitable) customers. Two ways to model adverse selection are to employ signaling games and screening games.

7.Specifically, we break down the general problem of adverse selection to two components: one is driven by the “traditionalâ€
selection on the level of expected health risk, while the other is driven by slope of
spending, namely the incremental medical utilization that is due to greater insurance
coverage, which we refer to as “moral hazard.â€
Such selection on moral hazard has implications for the standard analysis of both
selection and moral hazard. For example, a standard approach to influence selection
in insurance markets is risk adjustment; i.e., pricing on observable characteristics
that predict one’s insurance claims. The potential for selection on moral hazard,
however, suggests that monitoring techniques that are usually thought of as reducing
moral hazard—such as cost sharing that varies across categories of claims with
differential scope for behavioral response—may also have important benefits in
combatting adverse selection. In contrast, a standard approach to influencing moral
hazard is to offer plans with higher consumer cost sharing. But if individuals’ anticipated
behavioral response to coverage affects their propensity to select such plans,
the magnitude of the behavioral response could be much lower (or much higher)
from what would be achieved if plan choices were unrelated to the behavioral
response. As we discuss in more detail below, not only the existence of selection on
moral hazard but also the sign of any relationship between anticipated behavioral
response and demand for higher coverage is ex ante ambiguous.

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