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The problem of adverse selection is about asymmetric (unequal) information among opposite parties involved in a transaction. Note, this problem is not just about uncertainty; it is about the risks arising from asymmetric information. As risks increase from adverse selection and/or moral hazard, so do insurance premiums.
As an illustration of asymmetric information in health care insurance marketplace, patients and doctors know more about the health status of an individual, than potential insurance providers do. In addition, we anticipate the demand for health insurance to be greater for prospective individuals with higher health risks than for prospective individuals with lower health risks. Furthermore, individuals with higher health risks are drawn to more generous health insurance plans, while those with lower health risks settle for cheaper insurance plans. When risks in the insurance marketplace rise, so will insurance premiums, potentially causing a death spiral as healthy individuals leave the insurance pool when faced with rising rates.
Given this brief account of adverse selection in the health insurance market place, discuss the following:
The cross-price elasticity of demand for textbooks and copies of old exams is -3.5. If the price of copies of old exams increase by 10%.
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Daniel deposits $20,000 into an account earning interest at 6% per year compounded quarterly. He wishes to withdraw $400 at the end of each month. For how many months can he make these withdrawals?
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