How do adverse selection and moral hazard affect the market for insurance?
What will be an ideal response?
Both adverse selection and moral hazard drive up the price of insurance. People with a higher probability of the insurable outcome are the ones who buy the insurance (adverse selection), and having insurance increases the probability of the insurable outcome occurring because the person no longer tries as hard to avoid the outcome (moral hazard). Adverse selection and moral hazard may drive the price up so much that some people don't want to buy the insurance.
You might also like to view...
In the model of the money supply process, the depositor's role in influencing the money supply is represented by
A) the currency holdings. B) the currency holdings and excess reserve. C) the currency holdings and borrowed reserve. D) the market interest rate.
Suppose your $50,000 certificate of deposit matures and you transfer the funds to your checking account. This causes
A) M1 to decrease by $50,000 and M2 to increase by $50,000. B) M1 to increase by $50,000 and M2 to remain the same. C) both M1 and M2 to increase by $50,000. D) no change to either M1 or M2.
Calculate the discounted value of $2,875 to be received from a bank a year later at an interest of 15 percent per annum
a. $2,625 b. $2,075 c. $2,015 d. $2,500
One of the reasons that successful proprietors may be reluctant to borrow money from a bank to expand their business is that
a. expanded businesses generally generate lower rates of profit b. the bank would become a part owner c. unlimited liability cramps ambition d. the bank's liability insurance isn't sufficient to cover expected liabilities e. issuing stock to finance the expansion is less costly