Before selling anyone a health insurance policy, the Kramer...

Name: Problem 3, Chapter 22: Principles of Microeconomics
Uploaded: 2021-02-27T21:08:03-08:00
Duration: 3 min 30 s
Channel: Ethan Renner
Description: Before selling anyone a health insurance policy, the Kramer Insurance Company requires that applicants undergo a medical examination. Those with signifi- cant preexisting medical problems are charged more. This is an example of a. moral hazard. b. adverse selection. c. signaling. d. screening.

Before selling anyone a health insurance policy, the Kramer Insurance Company requires that applicants undergo a medical examination. Those with signifi- cant preexisting medical problems are charged more. This is an example of a. moral hazard. b. adverse selection. c. signaling. d. screening.

Before selling anyone a health insurance policy, the
Kramer Insurance Company requires that applicants
undergo a medical examination. Those with signifi-
cant preexisting medical problems are charged more.
This is an example of
a. moral hazard.
b. adverse selection.
c. signaling.
d. screening.

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Key Concepts

Adverse Selection

Adverse selection occurs when one party in a transaction has more or better information than the other, leading to a situation where higher-risk individuals are more likely to engage in the transaction. In insurance, if individuals know more about their health risks than the company does, those with higher risks may be more likely to seek insurance, causing inefficiencies and increased costs for insurers.

Screening

Screening is a strategy used by the less-informed party to mitigate problems caused by information asymmetry. In the context of insurance, companies implement screening procedures—such as requiring medical examinations—to induce applicants to reveal their true risk levels. This allows insurers to differentiate between low-risk and high-risk individuals and adjust premiums accordingly.

Transcript

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