Question

To reduce their disadvantage due to buyers having private information, auto insurers try to
collect information from customers that relate to how costly the customer will be to the insurer.
create incentives for buyers to be high-cost buyers so that they will pay more for insurance.
raise the price of all policies.
reduce the costs of providing insurance.
Allowing buyers to opt-in and opt-out of the market at any time they desire.

Which of the following is NOT an example of a solution to an adverse selection problem that is caused by the seller's having private information?
An independent organization verifies organic production and publishes a list of certified organic farmers.
The government bans the sale of air conditioners with energy efficiency below a certain standard.
A producer of a weight loss supplement offers a money-back guarantee that its product works.
A buyer's organization makes a verified list of product characteristics demanded by buyers.

What worsens adverse selection in a dental insurance market where buyers have private information?
Selling only to risk-averse buyers.
Requiring that each buyer's premium be based on that specific buyer's costs.
Grouping buyers by a risk factor and charging a premium based on risk.

Benjamin sells used cell phones, and buyers find it difficult to assess the quality of this product before buying. Which of the following statements is NOT consistent with the situation in Benjamin's market?
Customers will pay only a low price, even if the phone quality is high.
The market will skew toward low quality.
Adverse selection of buyers will be present.
Benjamin may end up selling low-quality used cell phones.

When you have health insurance, your marginal benefit of a visit to the doctor's office is _____, and your marginal cost is _____.

higher; higher
higher; lower
unchanged; lower
unchanged; higher

Answer 1

• To reduce their disadvantage due to buyers having private information, auto insurers try to
  Answer -(b) create incentives for buyers to be high-cost buyers so that they will pay more for insurance.
  Explanation - This is a problem known as adverse selection. To, reduce chances of adverse selection, and to reduce exposure to large claims, auto insurers would try to limit the coverages or raise premiums. Option b, exactly talks about paying more for insurance(or raising premiums). Hence, it is the correct answer. None of the options- a,c,d,e talks about either limiting coverages or raising premiums, hence are incorrect
  
• Which of the following is NOT an example of a solution to an adverse selection problem that is caused by the seller's having private information?
  Answer - (c) A producer of a weight loss supplement offers a money-back guarantee that its product works.
  Explanation - The only way to tackle adverse selection, is to reduce asymmetric information by providing relevant information to buyers, about the sellers. Option a , b and d reduces that information gap, while in option c, the money back guarantee does not ensure that the information would always be correct about a seller. Hence, c is not an example of a solution to adverse selection.
  
• What worsens adverse selection in a dental insurance market where buyers have private information?
  Answer - (a)Selling only to risk-averse buyers.
  Explanation - This will be uneconomical in the dental insurance market, as buyers who take risks are not well off. In option b and c, charging premiums based on risk factors and specific costs are the right way to reduce adverse selection. Hence, b and c are incorrect, and a is the correct answer.
  
• Benjamin sells used cell phones, and buyers find it difficult to assess the quality of this product before buying. Which of the following statements is NOT consistent with the situation in Benjamin's market?
  Answer - (b) The market will skew toward low quality.
  Explanation - Since, there is no way for buyers to determine the quality of the used phone, customers are equally likely to get high quality products for a lower price, since Benjamin is selling used phones. Hence, a, c and d are all consistent with the market. But, ther is not any definite proof that the market will skew towards low quality.