Question

Our health insurance market exists primarily through employer provided health care. Why does this lead to lower premiums than would exist in a market for health insurance where individuals purchased insurance themselves? 5. Maytag offers a 10 year warranty on washers and dryers, and consumers are willing to pay more for Maytag products than for Kenmore products. Kenmore could charge more for their products if they offered a similar warranty, but they choose not to. Why? 6. How does having an air bag and seat belt add to the moral hazard involved in car insurance markets? 7. Identify a principal-agent relationship in your organization, or an organization you are familiar with. How is the agent monitored? What incentives exist for the agent to act in the principal’s best interest?

Answer 1

1. Employment provided insurance is subsidised as employer pays large fraction of premium or entirely for bulk of theit employees and thus receive higher discount and lower premium payments with higher returns and thus is cheaper and cost effective compared to individual insurance premium.
2. Kenmore may not choose to charge more to remain competitive and offer lowest prices becaus eof slightly lower Inferior quality and subsequently lower warranty creating lower cost for production an dhence to tap low end customer Knemore may charge less comparatively.
3. Aiebags and seatbelts assure consumers of safety and hence additional risk is taken causing accidents probability to be high which causes higher cost to insurance provider for payout and hence creates moral hazard as one bears cost for others benefits.
4. Principal agents problems exists ks in organisation where managers are agents and organisation itself is Principal. Managers take decisions based on their intuition and judgment on behalf of organisation and any economic loss is borne by organisations causing Principal agent problems to arise. For an agent an incentive to act in best interests of principal is to receive good compensation and remuneration.