Exam 16: Adverse Selection

Good drivers have a 20% chance,and bad drivers have a 50% chance,of getting into an accident.A car is worth $900,and an accident would reduce its value to $400.Both types of drivers have utility U = (car value)^0.5.What is a good driver's expected utility without insurance?

Suppose the Ajax Insurance Company provides insurance for skydivers whose wealth before diving is $400.An accident will leave divers with a wealth of $100.The company divides the divers into two classes: safe (probability of an accident = 0.2)and unsafe (probability of an accident = 0.5).The utility of wealth for all divers is given by the function: U(w)= w^0.5.The utility of no insurance for the safe diver is:

Which of the following is a credible signal of product quality?

Good drivers have a 20% chance,and bad drivers have a 50% chance,of getting into an accident.A car is worth $900,and an accident would reduce its value to $400.Both types of drivers have utility U = (car value)^0.5.What is a bad driver's expected utility without insurance?

Adverse selection implies that:

Insurance companies are able to offset the adverse selection in markets for life insurance by:

The signaling model of education would be ineffective if:

Suppose that in Milford,Connecticut,owners of used cars that are lemons value their cars at $2,500,and owners of used cars that are reliable value their cars at $6,000.There are equal quantities of each type of car on the market.Buyers value low-quality cars at $1,500 and high-quality cars at $7,000.In this market:

The best possible pricing scheme in this figure would:

Which of the following is the best example of adverse selection?

Most states require car owners to provide evidence that they have auto insurance when they register their cars and obtain license plates.For the sellers of insurance policies,this may help to limit the severity of the:

From whom would you prefer to buy a used car,everything else being equal?

Requiring applicants for life insurance to undergo a physical examination is an effective way to:

Suppose the Ajax Insurance Company provides insurance for skydivers whose wealth before diving is $400.An accident will leave divers with a wealth of $100.The company divides the divers into two classes,safe (probability of an accident = 0.2)and unsafe (probability of an accident = 0.5).The utility of wealth for all divers is given by the function: U(w)= w^0.5.Given this information,the divers are:

Suppose the Ajax Insurance Company provides insurance for skydivers whose wealth before diving is $400.An accident will leave divers with a wealth of $100.The company divides the divers into two classes: safe (probability of an accident = 0.2)and unsafe (probability of an accident = 0.5).The utility of wealth for all divers is given by the function: U(w)= w^0.5.If only the unsafe divers buy insurance and the premium is $100,the insurance company will: