Akerlof Also Discusses the Problem of ____In the Health Insurance

question 4

Multiple Choice

Akerlof also discusses the problem of ____in the health insurance market.Health insurers attempt to estimate, for each individual insurance applicant, the probability that they will file an insurance claim, and price insurance premiums accordingly.However, this is an imperfect process, so the insurer must offer a common premium to a specified group of individuals that reflects the average health of the individuals in the group, even though the individuals in the group differ in terms of their health and thus the probability of a claim.Each individual knows their own health better than the insurer, so those members of the group who are less healthy (and thus more likely to file a claim) will be more likely to purchase insurance policy, and thus the premium set by the insurer to reflect the average health of the entire group will be inadequate to compensate the insurer for the ex post sub-group of individuals that actually purchase a policy.

• A)adverse selection
• B)certification
• C)moral hazard
• D)informational asymmetry

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Definitions:

Disposition

An individual's inherent qualities of mind and character.

Self-serving Bias

The tendency to attribute one's successes to internal factors and failures to external factors, protecting self-esteem.

Dispositional Reasons

Explanations for behavior that are attributed to an individual's inherent qualities or personality traits.

Disposition

A person's inherent qualities of mind and character.