Exam 16: Asymmetric Information

Use the following to answer questions 22-24: Figure 16.1 -(Figure 16.1) An individual who buys full-coverage automobile insurance will choose to take _____ unit(s) of action to prevent theft.

The costs of obtaining a college degree for high-productivity and low-productivity workers are as follows: High productivity: C_H = $20,000y Low productivity: C_L = $40,000y Where y is years in college. Suppose workers with a college degree are paid a lifetime income of $600,000, and workers without a college degree are paid a lifetime income of $450,000. For low-productivity workers, the net benefit of four years of college is _____, while the net benefit of not going to college is _____.

Consumers value high-quality dirt bikes at $6,000 and low-quality dirt bikes at $2,500. The supply of used high-quality dirt bikes is Q_H = 0.5P_H - 2,000, while the supply of used low-quality dirt bikes is Q_L = P_L - 1,000. Potential buyers cannot distinguish the difference between the two. Buyers base their willingness to pay on the belief that half the used dirt bikes are high-quality. At the buyers' willingness to pay sellers will offer _____ high-quality bikes and _____ low-quality ones.

Use the following to answer question: Figure 16.4 -(Figure 16.4) If the principal chooses a flat salary, the agent will _____ and earn a payoff of _____.

Use the following to answer question: Figure 16.2 -(Figure 16.2) Lilly, who owns the Cigar Bar and Grill, is considering whether to purchase fire insurance. Without insurance, the marginal benefit of precautions to reduce the risk of fire is given by MB₁.Which of the following statements is (are) TRUE?

Many states have laws requiring that health insurance policies cover the treatment of diabetes. One study found that after the passage of these laws, diabetics became fatter, which complicates the treatment. This study's finding is an example of:

A stand-up paddleboard outfitter operates without insurance. The outfitter's marginal cost of safety (e.g., staff training, rescue equipment) is MC_A = 100 + 14A. The marginal benefit of those actions is given by MB_B = 200 - 6A, where A is the number of safety actions taken. What is the optimal number of precautions for this outfitter to take?

Use the following to answer question: Figure 16.5 -(Figure 16.5) What is the likely outcome of this game?

Pam has a job at a jewelry kiosk in a mall. Pam doesn't like to work hard, and it costs her $100 to do so. Pam's employer cannot observe whether Pam works hard. If Pam works hard, there is a 75% probability that jewelry profits will equal $400 a day and a 25% probability that jewelry profits will equal $100 a day. Suppose Pam is paid $200 if jewelry profits are $400 a day and $50 if jewelry profits are $100 a day. What is Pam's expected pay for working hard?

Answer the following questions.

Use the following to answer question: Table 16.2 -(Table 16.2) Five people vary in health status. Each person knows his or her own health status and expected medical bills, which are given in the table. These people are considering buying health insurance. Assume that each person is equally likely to file a claim.

Suppose that the costs of going to college are given by: Low-ability person: C = $60,000y High-ability person: C = $30,000y where y is years in college. There are two types of workers, those with high ability and those with low ability. Employers cannot distinguish between them, so they pay each worker $250,000, the average value of output per worker. Employers will pay workers $380,000 if they earn a four-year degree.

Identify whether any of the following situations is a moral hazard, adverse selection, or principal-agent problem. Explain your reasoning in each case. a. A person in poor health purchases life insurance. b. A consumer is taxed on the purchase of a carton of cigarettes. c. A driver purchases auto insurance and then drives more recklessly. d. A computer programmer works from home on a fixed salary.

Use the following to answer question: Table 16.3 -(Table 16.3) You are the owner of a bowling alley, and you need to hire a manager to operate the facility. Because you live far from the bowling alley, you will not be able to keep an eye on the manager's effort. Your profit depends on the state of the economy and the manager's effort. A manager's utility depends on his salary and effort level, summarized as follows. Utility with low effort: U = salary Utility with high effort: U = salary - 8,000

Answer the following questions.

The Affordable Care Act (Obamacare) mandates that everyone buy health insurance or face a penalty. The rationale for this policy is to:

Use the following to answer questions 22-24: Figure 16.1 -(Figure 16.1) An individual with no automobile insurance will choose to take _____ units of action to prevent theft.

Adverse selection can occur when the:

Which of the following methods reduce adverse selection in insurance markets?