Evaluate the following statements. (a) Offering health insurance by employers as

Question

Evaluate the following statements.
(a) Offering health insurance by employers as a fringe-benefit reduces the
problem of adverse selection.
(b) Too little insurance means that people bear a lot of risk, too much
insurance means that people will take inadequate care!
(c) A limited warranty is a signal that the product is not a "lemon." Sears offers
satisfaction guaranteed or your money back on its Craftsman tools. Discuss
the pros and cons of this unconditional warranty.
(d) High switching costs locks-in consumers from buying substitute goods
that may be cheaper.

Explanation / Answer

(a). Not only economists but also the common public tend to play game theory and expected return on investments though not consciously. Hence, they tend to neglect taking health insurance, by themselves, unless they are sure that they are going to benefit from it. Hence, a company offering health insurance to its employees reduces the problem of adverse selection.

(b). First statement is true, but the second statement is not completely true. A person don't consume poison just because he is having an insurance. Because, end of the day, insurance will provide only a monetary relief but the person will suffer physical and mental agony.

(c). An unconditional warranty generally shows the confidence that a company has on its offerings. It's provided only when they are 100% sure that the product or the service in offering will be liked by the consumer. So consumers also tend to buy these goods or services which offer unconditional warranty. However, in US, there were so many instances where tourists buy high-end cameras, use it and return it at the end of their tour. It's just because the shop owner said there is unconditional return. So unconditional warranty can be misused by miscreants.

(d). It's true that when the switching cost is too high, that will offset the benefit that one can avail by opting for the cheaper substitutes. Say, for example you have availed a wi-fi connection from an ISP and they will charge some hefty amount for cancelling it. So, there are very few chances that you pay that hefty cancellation fee and opt for an ISP which is much cheaper than the existing one.

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