Understanding Insurance and Imperfect Information
With this skill you will learn
- Explaining how Insurance works
- Classifying people into risk groups
- Understanding The Moral Hazard Problem
- Explaining The Adverse Selection Problem
Understanding Insurance and Imperfect Information Questions
5. Insurance companies often classify people into risk groups, and charge lower premiums to those with lower risks because________________.
a. If people are not separated into risk groups, then those with low-risk must pay for those with high risks.
b. If people are not separated into risk groups, then those with high-risk must pay those with low risk.
c. both a and b
8. What is the impact of adverse selection on economic efficiency in a market?
a. Adverse selection will increase economic efficiency.
b. Adverse selection will reduce economic efficiency.
c. Adverse selection does not have any impact on economic efficiency in a market.
d. Consumer wants will shift toward the goods left in the market.
9. Asymmetric information problems are particularly severe in the market for insurance. This is true because
a. insurance companies will always know more about the likelihood of an event happening than will buyers of insurance.
b. buyers of insurance will always know more about the likelihood of an event happening than will insurance companies.
c. insurance companies and buyers of insurance cannot distinguish between good and bad information.
d. insurance companies are non-depository financial institutions.
12. Which of the following is a consequence of the adverse selection problems that health insurance companies face?
a. Health insurance companies charge less for young, healthy people than old, less healthy people.
b. Health insurance companies sometimes refuse to offer health insurance to people with chronic illnesses.
c. Health insurance companies sometimes refuse to offer group insurance to large companies because there are too many insured people to accurately price this insurance.
d. The equilibrium quantity of health insurance is greater than it would be in the absence of adverse selection.
15. The components of the Affordable Care Act (ACA) include:
a. a requirement that healthcare providers switch to electronic medical records (EMRs).
b. the requirement that states establish health insurance exchanges, or markets.
c. the regulation that caps the amount healthcare providers can spend on administrative costs.
d. all of the above
7. When adverse selection exists in the used car market, which of the following will prevail?
a. Buyers will generally offer a very high price, closer to the price of a good car.
b. Buyers will generally offer a very low price, closer to the price of a lemon.
c. Buyers will generally offer a price somewhere between the price they would be willing to pay for a good car and the price they would be willing to pay for a lemon.
d. All buyers will end up buying a car.
13. Which of the following is true about adverse selection and moral hazard?
a. Adverse selection is a consequence of asymmetric information; asymmetric information is a consequence of moral hazard.
b. Insurance companies can eliminate adverse selection by charging deductibles and co-insurance, but charging deductibles and co-insurance increases the risk of moral hazard.
c. Adverse selection affects only the market for automobile insurance; moral hazard affects only the markets for health and life insurance.
d. Adverse selection refers to what happens at the time of entering into a transaction; moral hazard refers to what happens after entering into a transaction.