Which Statement Best Characterizes the Second-Best Policy Offered by a Monopoly

question 12

Multiple Choice

Which statement best characterizes the second-best policy offered by a monopoly insurer when it can't observe the consumer's risk?

• A)It is a single contract offering partial insurance at an intermediate price such that all types are served.
• B)It is a menu of contracts providing full insurance for the least risky types and partial insurance for higher risks.
• C)It is a menu of contracts providing full insurance for the riskiest type and partial insurance at lower prices for lower risks.
• D)The market breaks down since the monopolist cannot design contracts without observing each consumer's risk.

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Definitions:

Financial Investment

An allocation of resources, typically money, into assets or endeavors expected to generate financial returns or growth over time.

Elaboration Likelihood Model

Theory identifying two ways to persuade: a central route and a peripheral route.

Persuade

The act of convincing someone to do or believe something through reasoning or argument.

Social Stimuli

External events or circumstances that can elicit or influence social behavior and responses.