Question

Evaluate each of the following statements:

a. Ultimately, a private insurance market unravels because buyers are risk-averse. If buyers were risk-neutral, there would always be prices at which cars would sell

b. Consumers with more elastic demand are less susceptible to moral hazard than those with less elastic demand.

Answer 1

a) False. The reason being that the buyers are already risk neutral .When the buyers are risk aversed the probability of buying the insurance increases which unravels the private insurance market. Due to the uncertainty about the quality of car because of asymmetric information the buyers prefer to have insurance market.

So the given statement is false.

b) When consumers have more elastic demand it means that they would take a higher insurance and as we know that a higher insurance increases the probability or suspectibility to moral hazard than those with less elasticity. This is because when an individual has a higher insurance he would become careless regarding the things insured which leads to increased moral hazard that is increase quantity demanded of insurance

So the above statement is false it would lead to more suspectability and not less.