Define the term adverse selection. Why is an insurance company unable to offer fair odds when it faces an adverse selection problem? How might the insurance company deal with an adverse selection problem?
What will be an ideal response?
Adverse selection occurs when fair odds are different for different people, but the insurance company is unable to distinguish people who are good risks from those who are poor risks. If the insurance company offered fair odds to everyone, then poor risks would purchase the policies designed for good risks and bankrupt the insurance company. The insurance company can deal with this adverse selection problem by limiting the amount of insurance that can be purchased at odds appropriate for good risks. In this situation, poor risks would find that they are better off purchasing unlimited amounts of insurance at the appropriate odds instead of a limited amount of insurance at more favorable odds.
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The demand for loanable funds curve shows the relationship between the quantity of loanable funds demanded and
A) the capital stock. B) the expected rate of profit. C) the real interest rate. D) depreciation. E) the price level.
Does section 2 of the Sherman Act make it a felony to "attempt" to monopolize an industry or must the attempt succeed before it is a felony?
What will be an ideal response?
By looking at aggregate demand via its component parts, we can conclude that the aggregate demand curve is downward sloping because
A) a lower inflation rate causes the real interest rate to fall, and stimulates planned investment spending. B) a lower inflation rate causes the real interest rate to rise, and stimulates planned investment spending. C) a higher inflation rate causes the real interest rate to fall, and stimulates planned investment spending. D) a higher inflation rate causes the real interest rate to rise, and stimulates planned investment spending.
The property of diminishing marginal rate of substitution follows from the property that the indifference curve is
A) downward sloping. B) upward sloping. C) bowed in toward the origin. D) bowed out from the origin.