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A health insurance company knows that there are two types of customers (smokers and non-smokers), each facing different health risks. The probabilities of getting sick and the healthcare costs in the case of illness for the two customer types is given in the table below. Group Healthcare costs Probability of getting sick Smokers $1200 50% Non-smokers $1200 20% Assume that each customer has a monthly income of $1600 and has a utility function given by U(x)=sqrt(x), where x is the remaining income after medical/health insurance expenses have been paid. a. Explain the problem of “adverse selection” and the problem of “moral hazard.” Give one example of a market in which adverse selection occurs and one example of a market in which moral hazard can be observed. What is the difference between the two information problems? Explain the consequences of adverse selection and moral hazard for the principal – agent relationship. b. Discuss in detail the two ways (screening and signaling) in which the principal or the agent can try to resolve the problem of adverse selection. Give an example of screening and signaling and explain how the parties involved benefit from these strategies. c. For the numerical example above construct the lotteries associated with the income that remains after healthcare expenses have been paid for smokers and for non-smokers (assuming agents do not have health insurance). Calculate the expected utility associated with the lotteries for smokers and non-smokers. Calculate the certainty equivalent of the two lotteries. What is maximum amount that smokers and non-smokers are willing to pay for full insurance? Calculate the actuarially fair health insurance premium for the two groups of customers (i.e. the expected healthcare costs). d. Assume the company cannot distinguish between smokers and non-smokers and offers a full insurance contract to all customers. How much should the company charge for the full insurance contract? Which customer group will purchase full insurance?
Do you think the unemployment insurance program in the USA should be made more generous (like some European countries), or less generous? Why or why not?
Explain how each of the following developments would affect the supply of money, the demand for money, and the interest rate. For each case, show what happens in a closed economy and in a small open economy.
Jerome says that he will spend exactly $25 each month on new apps for his mobile device, regardless of the price of apps. Jerome's demand for apps is
In February 2015, Wal-Mart announced that it would increase the pay rate for all its lowest paid workers. Is this wage increase a growth in fixed costs or variable costs? Would it be affected by output? If Wal-Mart's sales drop off, how might the sto..
If the dollar appreciates in value relative to foreign currencies
Which among the equation will you choose for a better demand estimation. Illustrate answer in the language of statistics.
If a firm can sell its product for more than its fixed costs, but not for more than its totals costs:
Many manufacturers of clothing and other consumer goods open stores in outlet malls where they charge much lower prices than they charge in their own stores located within cities. Outlet malls are typically located a considerable distance from major ..
Subway charges a higher price for the 6-inch Veggie Delight Sandwich sub in New York City than it does in a small town in Iowa. Consumers collected coupons from free newspapers and magazines and take to the store to save money on products.
Which of the following is not a necessary precondition for economic growth?
Textile Workers of America is planning to strike for higher wages. Management predicts that if strike is successful, cost of labour will increase $100 per day. If strike is successful, how would this affect decision in part a to purchase a textile..
Ramon Rodriquez has just signed a $6 million contract. The contract calls for a payment of $1.2 million today, $1.5 million one year from now, $1.5 million two years from now, and $1.8 million three years from today. What is this contract really wort..
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