Principles of economic economic and the economy by tim taylo

Principles of economic: economic and the economy by tim taylor (3rd ed)

Chapter 18

3. What are some of the ways a seller of goods might reassure a possible buyer who is faced with imperfect information?

5.what are some of the ways that someone looking for a loan might reassure a bank that is faced with imperfect information about whether the loan will be repaid?

7.In an insurance system, would you expect each person to receive in benefits pretty much what they pay premiums? or it it just that the average benefits paid will equal the average premiums paid?

9. What is the problem of moral hazard?

11. Define deductibles, copayments, and coinsurance.

13. What is the key difference between a fee-for-service health care system and a system based on health maintenance organizations?

15.How might adverse selection make it difficult for an insurance market to operate?

Solution

(3)

This is an instance of information asymmetry faced by the buyer who doesn\'t have all available information about the seller. The seller can reassure the buyer in such cases, by providing the buyer with relevant information about after-sale support and service, warranty details, extended warranty details, user reviews available for the sellers and buyer testimonials in order to assure the potential buyers of reliability of the seller\'s product and/or services before, during and after the purchase.

(5)

This also is a case of information asymmetry where bank is unsure of the borrower\'s credibility. The borrower can lend credence to his creditworthiness by providing information about current and past earnings, bank statements, previous loan repayment records, credit rating and providing all details about the security provided for the proposed loan (in case of a secured loan).

(7)

In insurance (for example, medical insurance), all buyers do not receive the benefits to the tune of premium paid. For such consumers, the premium they pay is done to ward-off the risk inherent, which they would have to undertake if the insurance was not purchased.

The situation is evaluated by computing a probability-weighted cost-benefit analysis by comparing the probability of the insured even taking place multiplied by the cost to be borne if the insured event takes place, with the premium paid.

NOTE: First 3 questions are answered.