46. Which of the foll lowing statements is/are true regarding adverse selection?

Question

46. Which of the foll lowing statements is/are true regarding adverse selection? ise selection is the reason why private health-insurance markets are not able to provide coverage for everyone, unless there is substantial government involvement in the market through regulations and subsidies. Adverse selection arises from the fact that sick people are more likely than healthy people to desire health insurance. c. Adverse selection is the result of conglomerate mergers. d. All of the above are correct. e. (a) and (b) only are correct. 47. The own-price elasticity of demand for digital cameras is 0.5. The price of a digital camera decreases by 10%, what will happen to the quantity demanded? Quantity demanded will rise by 196. Quantity demanded will rise by 5%. Quantity demanded will rise by 10%. Quantity demanded will rise by 15%. Quantity demanded will rise by 50%. a. b. c, 48. In the market for dillamonds, the own-price elasticity of supply is 1.7, and the own-price elasticity of demand is 0.2. A tax is imposed. How is the burden of the tax distributed between buyers and sellers? a. b· c. d. The sellers bear most of the burden. The buyers bear most of the burden. The burden is distributed equally between buyers and sellers. The distribution of the burden is determined by law, and has nothing to do with the elasticities of demand and supply. Not enough information has been given to answer the question. c. 49. When electricity is generated by a coal-fired power plant, the resulting air pollution means that the true costs to society of generating the electricity are larger than the costs that are taken into account by the buyer and seller of electricity. Economists refer to this situation as a. monopsonistic exploitation. b. the invisible hand. c. an externality d. oligopolistic collusion. e. the substitution effect. 50. Assume that the individual consumer takes the market price as given. Then, the individual's demand curve is a. the marginal-revenue curve. b. the marginal-utility curve. c. the marginal-revenue-product curve. d. the average-variable-cost curve. e. all of the above.

Explanation / Answer

Adverse selection is a phenomenon wherein the insurer is confronted with the probability of loss due to risk not factored in at the time of sale. This occurs in the event of an asymmetrical flow of information between the insurer and the insured. There is a tendency for those in dangerous jobs or high-risk lifestyles to get life insurance.

Option (b) is correct as sick people desire insurance more than healthy people which leads to los to he insurer due to incomplete information provided by sick person to the insurer.

Option (a) is correct as adverse selection leads to a loss to private insurers due to which they are unwilling to provide insurance coverage to everyone. If the government provides subsidies for risky people or make some regualtions regarding complete information provided by insured to insurer , they can cover everyone.

Option (c) is correct. Conglomerates lead to adverse selection. A conglomerate is a group of risky and less risky people. Due to incomplete information provided about risky people involved in conglomerate, insurer provides insurance to conglomerate and faces a higher probability of loss.

Hence, option (d) all of the above are correct is the right option.

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