Deck 16: Asymmetric Information

Question 1

Ideally, regulations that address low-quality cars should:

A) ban the sale of low-quality cars.
B) make buyers fully aware of which cars are low-quality.
C) prevent low-quality cars from being sold to the public at discounted prices.
D) make sellers fully aware of which cars are low-quality.

Answer 1

B

Question 2

Based on John List's research on sports memorabilia shows, you should advise a buyer of antique furniture at a flea market to:

A) purchase from local dealers.
B) pay with cash.
C) use an alias.
D) pay with a check.

Answer 2

A

Question 3

In the market for used air rifles, the overwhelming majority of rifles for sale do not shoot very accurately. This situation is an example of _____ and results from _____.

A) signaling; adverse selection
B) moral hazard; symmetric information
C) adverse selection; asymmetric information
D) an agent problem; moral hazard

Answer 3

C

Question 4

Suppose that at an auction there are four lawn mowers, two with a quality rating of 4 and two with a quality rating of 1. The scale runs from 1 to 4, with 1 being worst and 4, near-mint condition. Sellers know the quality rating of their lawn mower and value it at 100Q, where Q is the quality rating. Buyers do not know the quality rating of any specific lawn mower, but assume that buyers know the average quality rating of all the lawn mowers being offered for sale. Buyers value lawn mowers at , where is the average quality rating of lawn mowers being offered for sale at the current auction price. Which of the following statements is (are) TRUE?

A) I and II
B) I, II, and III
C) I and III
D) III

Question 5

Warranties on products _____ asymmetric information, but they do _____ the lemons problem.

A) reduce; not reduce
B) do not eliminate; reduce
C) increase; not reduce
D) do eliminate; increase

Question 6

Lucy, who has no mechanical knowledge of automobiles, takes her car to a mechanic because of a pinging noise in the engine. The transaction between Lucy and the mechanic is characterized by:

A) symmetric information with complete ignorance.
B) asymmetric information.
C) symmetric information.
D) complete information.

Question 7

Suppose there are four boats available at an auction. The sellers know the quality of their boats but the prospective buyers don't. The buyers know that two of the boats are high-quality and two of the boats are low-quality. Buyers value high-quality boats at $100,000 and low-quality boats at $60,000. Sellers value high-quality boats at $80,000 and low-quality boats at $40,000. If the auctioneer sets a price per boat at $50,000, how many boats and of which type will sellers make available?

A) all four boats
B) two high-quality boats
C) two low-quality boats
D) one high-quality and one low-quality boat

Question 8

Vehicle leasing _____ the number of high-quality used cars and _____ adverse selection.

A) increases; reduces
B) increases; increases
C) decreases; reduces
D) decreases; increases

Question 9

In a small island population, half the people are healthy and half are sick. The annual expected medical claims of the healthy and sick are $200 and $4,000, respectively. Assume that the health insurance company does not know whether people are healthy or sick before they buy insurance. If the health insurance company charges an annual premium of $2,100 (the average expected claim), only the _____ will buy insurance, driving future premiums _____.

A) sick; up
B) healthy; down
C) sick; down
D) healthy; up

Question 10

In the market for karate lessons, the instructors know more about the quality of their instruction than their students do. This situation may set up a:

A) lemons problem.
B) sensei equilibrium.
C) subgame outcome.
D) dojo fruition.

Question 11

Carfax offers a report on used cars for $39.99. It details the ownership type and history, vehicle mileage, accident reports, and other information. Carfax is an example of how markets try to:

A) increase adverse selection.
B) lessen the lemons problem by reducing asymmetric information.
C) profit from increasing information disparities between buyers and sellers.
D) address an inefficiency by making things worse because buyers must now pay for the report.

Question 12

Ted purchased a comprehensive insurance policy for his car. Which of the following is an example of moral hazard?

A) Because of his insurance coverage, Ted avoids driving when the roads are icy.
B) Because of his insurance coverage, Ted no longer locks his car doors.
C) Because of his insurance coverage, Ted uses a designated driver for the nights he spends bar hopping.
D) Because of his insurance coverage, Ted replaced his worn-out tires with Michelin tires.

Question 13

Which of the following statements is (are) TRUE?

A) I and II
B) II
C) III
D) I, II, and III

Question 14

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

A) I, II, III, and IV
B) I and III
C) III
D) I and II

Question 15

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

A) solve the adverse selection problem.
B) solve the moral hazard problem.
C) make sure that high-risk people pay higher premiums than low-risk people.
D) ensure that Medicare enrollees pay actuarially fair insurance premiums.

Question 16

Adverse selection can occur when the:

A) I, II, and III
B) II
C) I and II
D) III

Question 17

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.

A) 125; 3,250
B) 2,000; 2,000
C) 450; 900
D) 3,000; 1,500

Question 18

At a swap meet, 10 sellers are each trying to sell a used 5.7-L Chevy engine. Half the engines are in mint condition, with each valued by its seller at $3,000. The other engines need repair, and each is valued by its seller at $1,000. Buyers value a mint engine at $3,500 and an engine that needs repair at $1,600. Sellers know whether their engine is in mint condition or needs repair, and buyers can distinguish between engines in mint condition and those needing repair. How many engines will be sold at the swap meet?

A) zero
B) 10
C) five mint engines and none that need repair
D) no mint engines and five that need repair

Question 19

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; the supply of used low-quality dirt bikes is Q_L = P_L - 1,000. Potential buyers cannot distinguish the difference between the two. If buyers believe that half the used dirt bikes are high-quality, what price are buyers willing to pay for a used dirt bike?

A) $3,500
B) $1,250
C) $3,000
D) $4,250

Question 20

Community rating regulations require insurance companies to charge everyone the same premium, with sometimes slight adjustment for age and gender, regardless of a person's health status. This regulation _____ adverse selection. _____ people and _____ people are _____ likely to buy insurance because the companies cannot legally offer them _____ premiums based on their risk factors.

A) worsens; Low-risk; healthy; more; higher
B) improves; High-risk; healthy; less; lower
C) improves; High-risk; sick; more; higher
D) worsens; Low-risk; healthy; less; lower

Question 21

Which of the following is (are) examples of moral hazard?

A) I, II, and III
B) I
C) II
D) I and II

Question 22

Principal-agent problems arise from:

A) asymmetric information.
B) hyperbolic discounting.
C) risk aversion.
D) deadweight losses.

Question 23

Suppose a company's owners have a hard time observing whether management is acting primarily in its own interest or for the benefit of the company. This situation sets up a(n):

A) fiduciary responsibility conundrum.
B) principal-agent problem.
C) problem with inefficient loss aversion.
D) symmetry relationship.

Question 24

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 _____.

A) shirk; 150
B) shirk; 75
C) work hard; 133
D) work hard; 100

Question 25

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) cost lag.
B) hysteresis.
C) the multiplier.
D) moral hazard.

Question 26

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?

A) I and III
B) III
C) II
D) I

Question 27

Use the following to answer questions 22-24:
Figure 16.1
(Figure 16.1) If an individual with no insurance purchases partial coverage, the marginal _____ curve will shift _____, leading her to _____ theft prevention measures.

A) benefit; downward; reduce
B) benefit; upward; increase
C) cost; downward, reduce
D) cost; upward; increase

Question 28

Stan, a soybean farmer, acts to prevent crop failure. The marginal benefit is represented by MB = 80 - A, where A is the number of precautions. The marginal cost of these precautions (e.g., soil preparation and pesticide and fertilizer use) is MC = 20 - 0.5A. Suppose the government offers Stan crop insurance, which changes the marginal benefit of taking precautions to MB = 65 - 2A. The number of precautions Stan takes _____ from _____ without insurance to _____ with insurance.

A) falls; 20; 3
B) falls; 40; 20
C) falls; 120; 30
D) rise; 60; 140

Question 29

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 or not. 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. If Pam shirks, there is a 75% probability that jewelry profits will equal $100 a day and a 25% probability that jewelry profits will equal $400 a day. Suppose Pam is paid $200 if jewelry profits are $400 a day and $50 if jewelry profits are $100 a day. Pam will _____ because the net gain of _____ from shirking is _____ than the net gain of _____ from working hard.

A) shirk; $87.50; more; $62.50
B) shirk; $125; more; $118
C) work hard; $50; less; $62.50
D) work hard; $100; less; $250

Question 30

Which of the following statements is (are) TRUE?

A) I
B) I and II
C) III
D) II

Question 31

Which of the following practices mitigates moral hazard?

A) I
B) I, II, and III
C) III
D) II and III

Question 32

Marty, a musician, frequently plays at large parties and nightclubs. Marty has musical equipment worth $8,000, and he takes precautions to prevent theft. The marginal benefit of these precautions is given by MB = 60 - 3A, where A is the number of precautions Marty takes to reduce theft. The marginal cost of preventing theft (i.e., the time, energy, and effort expended) is given by MC = 2A. What is Marty's optimal level of precautions?

A) 20
B) 12
C) 30
D) 60

Question 33

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.

A) 0
B) between 1 and 3
C) 4
D) 8

Question 34

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

A) The landlord will not require a $500 damage deposit, and the tenant will not play golf inside.
B) The landlord will require a $500 damage deposit, and the tenant will not play golf inside.
C) The landlord will require a $500 damage deposit, and the tenant will play golf inside.
D) The landlord will not require a $500 damage deposit, and the tenant will play golf inside.

Question 35

Use the following to answer question:
Figure 16.3
(Figure 16.3) What is the equilibrium in this principal-agent game?

A) (800 , 120)
B) (540 , 210)
C) (700 , 150)
D) (600 , 80)

Question 36

Which of the following statements is (are) TRUE of selling agents in residential real estate transactions?

A) Because agents are paid on commission, there is no principal-agent problem.
B) Agents have an incentive to sell quickly, without waiting for slightly higher offers.
C) If an agent sells an owner's home for an additional $20,000, the agent stands to gain more than the owner.
D) Owners know more than agents about the state of the real estate market and the value of comparable homes.

Question 37

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?

A) $250
B) $100
C) $225.75
D) $162.50

Question 38

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.

A) 0
B) 1
C) 2
D) 3

Question 39

Pam works 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 90% probability that jewelry profits will equal $400 a day and a 10% probability that jewelry profits will equal $100 a day. If Pam shirks, there is a 90% probability that jewelry profits will equal $100 a day and a 10% probability that jewelry profits will equal $400 a day. Suppose Pam is paid $200 if jewelry profits are $400 a day and $50 if jewelry profits are $100 a day. Pam will _____ because the net gain of _____ from shirking is _____ than the net gain of _____ from working hard.

A) shirk; $50; more; $45
B) shirk; $75; more; $65
C) work hard; $45; less; $185
D) work hard; $65; less; $85

Question 40

Marty, a musician, frequently plays at large parties and nightclubs. Marty has musical equipment worth $8,000, and he takes precautions to prevent theft. The marginal benefit of these precautions is given by MB = 60 - 3A, where A is the number of precautions Marty takes. The marginal cost of preventing theft (i.e., the time, energy, and effort expended) is given by MC = 2A. Suppose Marty purchases full insurance that pays him $8,000 if his gear is stolen. What is Marty's optimal level of precautions?

A) 0
B) 2
C) 5
D) 20

Question 41

In the used car market, what institutions help limit the lemons problem?

Question 42

Your car needs an oil change. After working on the car, your mechanic comes out to the waiting room and tells you your car needs a tire alignment. Does this transaction exhibit asymmetric information? Explain.

Question 43

Suppose that a company offers insurance for the cost of surgical hair replacement. After selling this insurance for a short period, the company finds that almost all of its customers are undergoing hair replacement treatment and filing a claim. What problem does the company face? Is there anything it could do to limit this problem?

Question 44

The costs of obtaining a college degree for high-productivity and low-productivity workers are as follows: High productivity: C_H = $120,000
Low productivity: C_L = $180,000
Suppose workers with a college degree are paid a lifetime income of $400,000 and workers without a college degree are paid $230,000. Which of the following statements is (are) TRUE?

A) Both high- and low-productivity workers choose to get a college degree.
B) Neither high- nor low-productivity workers choose to get a college degree.
C) The net lifetime income of high-productivity workers increases by $50,000 because of their college degree.
D) Low-productivity workers are better off getting a college degree.

Question 45

Suppose there are two types of fruit pickers. Fast pickers bring in more than 10 units of fruit per day, while the slow pickers bring in fewer than 10 units per day. Johnson Farm pays pickers a flat rate of $50 per day, and Henry Farm pays pickers $5 for every unit picked. The pickers know their productivity level, but the farms don't know a picker's productivity until he or she starts working.

Question 46

For a signal to be meaningful, its cost must be:

A) the same for everyone.
B) zero.
C) lower for high-quality goods than for low-quality goods.
D) higher for high-quality goods than for low-quality goods.

Question 47

Use the following to answer question:
Table 16.1
(Table 16.1) At a sale of used cars, nine people are trying to sell their cars. Each of the sellers knows the quality rating of his car, all of which the table displays, and which range from 0 to 2.
Sellers value their car at 1,000Q, where Q is its quality rating. Buyers do not know the value of any given car, but they do know the average quality rating of all cars that are available at the going price. Buyers value any given car at , where is the average quality rating of the cars available for sale. Complete the following table.

Question 48

The market for used sea kayaks has both a high-quality and low-quality variety. High-quality kayaks are valued at $3,000 and low-quality ones at $800. Supply of used high-quality kayaks is Q_H = 0.5P_H - 1,000, and the supply of used low-quality kayaks is Q_L = P_L - 500. Potential buyers cannot distinguish between a high-quality and a low-quality used kayak. Buyers believe that only 3 of 10 used kayaks are high-quality. What are buyers willing to pay and how many used sea kayaks will be sold?

Question 49

Suppose workers with a college degree are paid a lifetime income of $500,000 and workers without a college degree are paid $300,000. The cost of obtaining a college degree for high-productivity workers is $100,000. For a college degree to serve as a useful productivity signal, the cost of a college degree for low-productivity workers must be:

A) greater than $200,000.
B) less than $200,000.
C) greater than $100,000.
D) less than $100,000.

Question 50

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 _____.

A) $500,000; $150,000
B) $440,000; $450,000
C) $150,000; $40,000
D) $600,000; $120,000

Question 51

Use the following to answer question:
Figure 16.6
(Figure 16.6) The figure shows the cost of college for high- and low-productivity workers. Based on the college wage premium:

A) high-productivity workers will get a four-year degree.
B) all workers will get a four-year degree.
C) high-productivity workers will choose six years of college.
D) neither type of worker will get a four-year degree.

Question 52

Suppose half of workers have high productivity and half of workers have low productivity. High-productivity workers are valued at $100,000 a year and low-productivity workers are valued at $40,000 a year. Because of asymmetric information, employers cannot tell them apart, so all workers are paid according to the average economy-wide value of productivity. If high-productivity workers found a method to signal their productivity to employers, high-productivity pay would _____ by $30,000, and low-productivity pay would _____.

A) increase; increase by $30,000
B) increase; decrease by $30,000
C) decrease; increase by $30,000
D) increase; remain unchanged

Question 53

In a market whose sellers know whether their good is a plum or a lemon, why might lower prices NOT lead to a greater quantity transacted between buyers and sellers?

Question 54

A small town has 1,000 people, of whom 400 are sick. The annual expected medical claims of the healthy and sick are $500 and $9,000, respectively. If the insurance company cannot determine who is healthy and who is sick prior to the purchase of insurance, what annual premium will they set? Will this lead to adverse selection? Why or why not?

Question 55

Which of the following statements is TRUE?

A) Evidence suggests that schooling raises earnings only by raising productivity.
B) Sheepskin effects are consistent with signaling.
C) The sheepskin effect refers to evidence that students with a four-year college degree earn no more than students with four years of college but no degree.
D) The effects of signaling are the smallest for recent graduates who are just starting to work.

Question 56

The signaling model of education assumes that attending college will:

A) improve the productivity only of people with high innate ability.
B) improve the productivity only of people with low innate ability.
C) not improve productivity.
D) improve the productivity of all people.

Question 57

Some employers no longer consider a prospective employee's grade point average as a useful signal. Why might this be the case?

A) because only the really smart students receive high grade-point averages
B) because grade inflation has made it considerably easier for students with a poor work ethic and little self-control to get high grades
C) because it is not fair to the students who put in a lot of effort and still get bad grades
D) because productivity is highly correlated with a worker's grade-point average

Question 58

Answer the following questions.

Question 59

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.

Question 60

The supply of used high-quality motorcycles is Q_H = 0.2P_H - 1,000, and the supply of used low-quality motorcycles is Q_L = 0.5P_L - 1,000. In the used-motorcycle market, potential buyers cannot tell them apart.

Question 61

Many people buy used smartphones from eBay, Craigslist, and so on. Some of these phones are good quality, but many others are not, and customers often have a difficult time distinguishing between the two types. Good smartphones are valued at $400 and poor ones at $100. The supply of good smartphones is given by Q_H = 2P_H - 300; that of poor smartphones is given by Q_L = 4P_L - 100. If consumers believe that 40% of used smartphones are good quality, then the expected price of a used smartphone is _____. At that price, _____ good smartphones and _____ poor ones will be sold, making the actual likelihood of buying a good phone equal to _____.

Question 62

Mona and Joseph own a home. Based on the figure provided, what will be the optimum number of actions (such as smoke detectors and sprinklers) to prevent fire in their house? Mona and Joseph decide to purchase fire insurance that reduces the marginal benefit of taking precautions by $4 at every action level. How will the new policy affect the optimal number of precautions?

Question 63

Answer the following questions.

Question 64

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?

Question 65

Joan, a landscaper, has hired Devin to help maintain the lawns under her care. They will be working in different locations, and Joan cannot monitor Devin's performance. If Devin works hard, Joan earns profit of $1,000 and Devin makes $100. If Devin does not work hard and Joan still pays a fixed wage, each makes $300. If Devin works hard and Joan pays him per lawn, she will earn $700 and Devin will make $200. Finally, if Devin does not work hard but Joan pays him per lawn, she makes $500 and he makes $150. Set up the game in extensive form and solve for the expected outcome of this principal-agent game.

Question 66

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.

Question 67

Suppose that a publisher is considering how to pay an author for writing a book. The publisher would like the author to put forth his maximum effort, but the publisher is unable to observe the author's effort.

Question 68

The cost of obtaining a four-year degree is $120,000 for low-ability workers and $60,000 for high-ability workers. Suppose that workers without a four-year degree are paid lifetime wages of $500,000. For education to be an effective signal of ability, what range of lifetime earnings must be paid to workers with a four-year degree?

Question 69

In green communities, it is common for homeowners to install solar panels on the street side of their house, even though it is the least sunny part of the house. Why would some homeowners behave this way?

Question 70

Myra drives a Honda Accord, the most stolen car in the United States. She can take precautions to prevent her car from being stolen. The marginal benefit and marginal cost of these actions are MB = 10 - 0.2A and MC = 2 + 0.6A, where A is the number of precautions. Myra values her car, a 1994 model, at $2,400.

Question 71

Donna is an unsupervised outside salesperson for a small electronics firm. Instead of working on commission, Donna is a salaried employee. What issue may this compensation arrangement lead to? Give a possible solution.

Question 72

Use the following to answer question:
Figure 16.7
(Figure 16.7) Towne Music would like the rock band Fufu Arrows to produce a 10-song record. Towne is considering paying the band either (1) a high flat fee or (2) a low flat fee plus royalties.

Question 73

The new Camaro SS has a 6.2-liter V8 engine that puts out over 400 horsepower. At the racetrack, the Camaro runs the quarter-mile in an impressive 12.9 seconds at 117 mph. General Motors provides a three-year warranty on the Camaro. How might the factory warranty set up a moral hazard? What could General Motors do to mitigate the moral hazard?

Question 74

Explain how moral hazard could arise in the following situations.

Question 75

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.

Question 76

Farmer Marley grows barley, and every year he risks losing his crop to drought, insects, or disease. Precautions such as proper soil preparation and the judicious use of water, fertilizer, and pesticide can reduce the risk of crop failure. The marginal benefit and marginal cost of these precautions are MB = 120 - 4A and MC = 20 + A, where A is the number of precautions.

Question 77

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

Question 78

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. The government has mandated that all SUP outfitters carry insurance, leading to a change in the outfitter's marginal benefit curve to MB_B = 140 - 6A. How does this government mandate change the efficient number of precautions taken by the outfitter?

Question 79

Consider Troy and Paula, each of whom recently purchased health insurance with a 20% coinsurance rate (i.e., an insured person pays 20% of the price of a physician visit). Troy's demand curve for physician visits is Q_R = 6, and Paula's demand curve for physician visits is Q_P = 20 - 0.10P, where Q represents the number of physician visits and P is the price per visit. Suppose that the market price, P, for physician visits is $100.