Question

1. Which of the following is not a way for insurance companies to respond to the problem of "adverse selection"?

Select the correct answer below:

separating insurance buyers into risk groups and charging them accordingly

trying not to sell insurance to the highest risk customers

deciding not to sell insurance in the market at all

requiring all insurance buyers to pay exactly the same monthly premium, regardless of their risk group

2. If we think of political positions along a spectrum from left to right, the median voter is ____________.

Select the correct answer below:

aligned with the mean on the spectrum

in the middle of the spectrum

not on the spectrum

none of the above

3. Government may provide goods and services in cases where markets may be more likely to produce unwanted results. Which of the following are examples of these cases?

Select the two correct answers below.

Select all that apply:

• high equilibrium prices

• discrimination

• failure to provide insurance

• high wages

Answer 1

1) Solution: requiring all insurance buyers to pay exactly the same monthly premium, regardless of their risk group

Explanation: To avoid the situation of adverse selection, the insurance company can make a decision for not selling the insurance in a specific market at all; and reduce exposure with separation of insurance buyers into risk groups with limiting coverage or raising premiums.

2) Solution: in the middle of the spectrum

Explanation: The theory of median voter argues that politicians would want to match policies that please the median voter preferences. When we consider the political positions along a spectrum from left to right, the median voter would be in the spectrum middle

3) Solution: high equilibrium prices; failure to provide insurance

Explanation: Adverse selection arises due to the undesired results thus causing high equilibrium prices and a failure to provide insurance