Chapter 22 - Chapter22Chapter22 FrontiersofMicroeconomics...

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SOLUTIONS TO TEXT PROBLEMS: Quick Quizzes 1. Buyers of life insurance will likely have higher than the average death rates.  Because those with  greater risks of death are more likely to buy life insurance, the price of life insurance will reflect  the costs of a riskier-than-average person.  Thus, buyers with low risk of death will find the price  of life insurance to be too high and will not choose to purchase it. Moral hazard is the tendency of a person who is imperfectly monitored to engage in dishonest or  otherwise undesirable behavior.  A person with a high risk of death may be aware of his risk but  not reveal this information to the insurance company. Adverse selection is the tendency for the mix of unobserved attributes to become undesirable  from the standpoint of an uninformed party.  In this case, the insurance company ends up  insuring only those individuals who have high risks of death. A life insurance company may require that all applicants submit to a medical examination to deal  with these problems. 2. According to the median voter theorem, if each voter chooses a point closest to his preferred  point, the district vote will reflect the preferences of the median voter.  Therefore, the district will  end up with a student-teacher ratio of 10:1. 3. Human decision making can differ from the rational human being of conventional economic  theory in three important ways: (1) people aren’t always rational, (2) people care about fairness,  and (3) people are inconsistent over time. Questions for Review 171 22 FRONTIERS OF  MICROECONOMICS
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172   Chapter 22/Frontiers of Microeconomics 1. Moral hazard is the tendency of a person who is imperfectly monitored to engage in dishonest or  otherwise undesirable behavior.  To reduce the severity of this problem, an employer may  respond with (1) better monitoring, (2) paying efficiency wages, or (3) delaying part of a worker’s  compensation.
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This note was uploaded on 06/11/2011 for the course ECON 101 taught by Professor Lemche during the Winter '05 term at The University of British Columbia.

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Chapter 22 - Chapter22Chapter22 FrontiersofMicroeconomics...

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