Principles of Microeconomics

Steven A. Greenlaw, David Shapiro

Chapter 16

Information, Risk, and Insurance - all with Video Answers

Educators

Chapter Questions

Problem 1

For each of the following purchases, say whether you would expect the degree of imperfect information to be relatively high or relatively low:
a. Buying apples at a roadside stand
b. Buying dinner at the neighborhood restaurant around the corner
C. Buying a used laptop computer at a garage sale
d. Ordering flowers over the internet for your friend in a different city

EA

Erwin Antoni

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Problem 2

Why is there asymmetric information in the labor market? What signals can an employer look for that might indicate the traits they are seeking in a new employee?

Mihir Nayar

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Problem 3

Why is it difficult to measure health outcomes?

EA

Erwin Antoni

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Problem 4

Why might it be difficult for a buyer and seller to agree on a price when imperfect information exists?

Mihir Nayar

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Problem 5

What do economists (and used-car dealers) mean by a "lemon"?

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Erwin Antoni

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Problem 6

What are some ways a seller of goods might reassure a possible buyer who is faced with imperfect information?

Mihir Nayar

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Problem 7

What are some ways a seller of labor (that is, someone looking for a job) might reassure a possible employer who is faced with imperfect information?

EA

Erwin Antoni

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Problem 8

What are some ways that someone looking for a loan might reassure a bank that is faced with imperfect information about whether the borrower will repay the loan?

Mihir Nayar

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Problem 9

What is an insurance premium?

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Erwin Antoni

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Problem 10

In an insurance system, would you expect each person to receive in benefits pretty much what they pay in premiums or is it just that the average benefits paid will equal the average premiums paid?

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Erwin Antoni

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Problem 11

What is an actuarially fair insurance policy?

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Erwin Antoni

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Problem 12

What is the problem of moral hazard?

Mihir Nayar

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Problem 13

How can moral hazard lead to more costly insurance premiums than one was expected?

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Erwin Antoni

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Problem 14

Define deductibles, copayments, and coinsurance.

Mihir Nayar

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Problem 15

How can deductibles, copayments, and coinsurance reduce moral hazard?

EA

Erwin Antoni

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Problem 16

What is the key difference between a fee-for-service healthcare system and a system based on health maintenance organizations?

Mihir Nayar

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Problem 17

How might adverse selection make it difficult for an insurance market to operate?

EA

Erwin Antoni

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Problem 18

What are some of the metrics economists use to measure health outcomes?

Mihir Nayar

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Problem 19

You are on the board of directors of a private high school, which is hiring new tenth-grade science teachers. As you think about hiring someone for a job, what are some mechanisms you might use to overcome the problem of imperfect information?

EA

Erwin Antoni

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Problem 20

A website offers a place for people to buy and sell emeralds, but information about emeralds can be quite imperfect. The website then enacts a rule that all sellers in the market must pay for two independent examinations of their emerald, which are available to the customer for inspection.
a. How would you expect this improved information to affect demand for emeralds on this website?
b. How would you expect this improved information to affect the quantity of high-quality emeralds sold on the website?

EA

Erwin Antoni

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Problem 21

How do you think the problem of moral hazard might have affected the safety of sports such as football and boxing when safety regulations started requiring that players wear more padding?

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Erwin Antoni

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Problem 22

To what sorts of customers would an insurance company offer a policy with a high copay? What about a high premium with a lower copay?

Mihir Nayar

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Problem 23

Using Exercise 16.20, sketch the effects in parts (a) and (b) on a single supply and demand diagram. What prediction would you make about how the improved information alters the equilibrium quantity and price?

EA

Erwin Antoni

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Problem 24

Imagine that you can divide 50-year-old men into two groups: those who have a family history of cancer and those who do not. For the purposes of this example, say that $20 \%$ of a group of 1,000 men have a family history of cancer, and these men have one chance in 50 of dying in the next year, while the other $80 \%$ of men have one chance in 200 of dying in the next year. The insurance company is selling a policy that will pay $100,000$dollars to the estate of anyone who dies in the next year.
a. If the insurance company were selling life insurance separately to each group, what would be the actuarially fair premium for each group?
b. If an insurance company were offering life insurance to the entire group, but could not find out about family cancer histories, what would be the actuarially fair premium for the group as a whole?
c. What will happen to the insurance company if it tries to charge the actuarially fair premium to the group as a whole rather than to each group separately?

Majid Borumand

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