An insurance company suffers from adverse selection if a) safe customers are les
ID: 1197787 • Letter: A
Question
An insurance company suffers from adverse selection if
a) safe customers are less likely to insure than risky customers.
b) customers know their willingness to pay for insurance but the company does not.
c) a customer takes on much greater risk because he is insured.
d) its customers are risk averse.
Which of the following is a potential solution to the adverse selection problem faced by insurance companies?
a) Offer plans with different deductibles so that higher-risk customers accept higher deductibles.
b) Create a national database of customers that allows companies to look up each person' s historical risk.
c) Mandate that every person purchase insurance.
d) All of the above
The "lemons" problem is that
a) cars of verifiable high quality are withheld from the used car market
b) cars of verifiable low quality are withheld from the used car market
c) cars of unverifiable high quality are withheld from the used car market
d) cars of unverifiable low quality are withheld from the used car market
Signaling is
a) actions by the informed party to reveal her true risks
b) actions by the informed party to conceal her true risks
c) actions by the uninformed party to uncover the true risks
d) actions by the uninformed party to conceal the true risks
When you buy a set of speakers, Best Buy asks if you would like to purchase insurance for your speakers. Assume that paying for new speakers for customers who listen to music at a reasonable level (thus minimizing damage) costs on average $150, and paying for new speakers for customers who listen to music very loudly (more likely to damage the speakers) costs on average $1000. Individual know whether they like music at a reasonable level or at a loud level, but Best Buy can assume that 40% of listeners are reasonable listeners, and 60% are loud listeners. How much does Best Buy have to charge in order to break even?
a) $660
b) $1000
c) $150
d) $575
Explanation / Answer
An insurance company suffers from adverse selection if
b) customers know their willingness to pay for insurance but the company does not.
Which of the following is a potential solution to the adverse selection problem faced by insurance companies?
c) Mandate that every person purchase insurance.
The "lemons" problem is that
a) cars of verifiable high quality are withheld from the used car market
Signaling is
a) actions by the informed party to reveal her true risks
When you buy a set of speakers, Best Buy asks if you would like to purchase insurance for your speakers. Assume that paying for new speakers for customers who listen to music at a reasonable level (thus minimizing damage) costs on average $150, and paying for new speakers for customers who listen to music very loudly (more likely to damage the speakers) costs on average $1000. Individual know whether they like music at a reasonable level or at a loud level, but Best Buy can assume that 40% of listeners are reasonable listeners, and 60% are loud listeners. How much does Best Buy have to charge in order to break even?
a) $660
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