Question

1)​In the market for insurance, the moral hazard problem leads:

​those most likely to collect on insurance to buy it.

​those who buy insurance to take fewer precautions to avoid the insured risk.

​those with less insurance to take on more risk.

​to none of the above.

2)​In the market for insurance, the adverse selection problem leads

​those most likely to collect on insurance to buy it.

​those who buy insurance to take fewer precautions to avoid the insured risk.

​those with less insurance to take on more risk.

​to none of the above.

---Suppose a person with automobile collision insurance is more likely to try to drive on an icy road in the middle of winter than that person would be if he or she didn't have automobile collision. This is an example of

adverse selection.

moral hazard.

the free-rider effect.

asymmetric information before exchange.

none of the above

------The __________ problem in the market for used cars is capable of collapsing the market for __________.

adverse selection; good used cars

adverse selection; lemons

moral hazard; good used cars

moral hazard; lemons

Answer 1

Answer 1: Option B.

In the market for insurance, the moral hazard leads to those who buy insurance to take fewer precautions to avoid the insured risk because they know that in case of any problem, the insurance company will have to pay. Thus, this leads to careless behavior.

Answer 2: Option B.

​In the market for insurance, the adverse selection problem leads those most likely to collect on insurance to buy it. Since there is problem of assymetric information in selecting the person to be insured, thus adverse selection leads to a person who is in the most need of insurance or with deteriorating health outcomes to buy the insurance.

Answer 3: Moral Hazard.

This represents carelessness shown by a person who is insured because the person knows that any loss will be covered by the insurance company. Thus, it is an example of moral hazard.

Answer 4: Option A.

The problem of adverse selection in the market for used cars is capable of collapsing the market for good used cars. It becomes difficult to find buyers of even good used cars because of the problem of adverse selection in the market for used cars.