Question

1) Asymmetric information is when: Buyers and sellers have unequal information Buyers know more than sellers Sellers know more than buyers All of the above 2) Asymmetric information leads to the problem 3) Consider the market for health insurance where it costs the insurance company $4,000 to insure a healthy person and $8,000 to insure a sick person. Suppose a healthy person's maximum willingness to pay for health insurance is $5,500 and a sick person's maximum willingness to pay is $10,000. Suppose the insurance company expects to receive 75% healthy customers and 25% sick customers. At what price will insurance in the market sell for? Be sure to include a dollar sign in front of your answer.

Answer 1

1)

Asymmetric information is said to exist when one party has more accurate or different information than the other person has. In this case, person with less information can be at disadvantage compared to other person.

So, correct option is

All of the above

2)

In economics, asymmetric information leads to adverse selection problem.

3)

Fraction of healthy persons=p=0.75

Cost of insuring a sick person=$4000

Fraction of unhealthy persons=1-p=0.25

Cost of insuring a sick person=$8000

Price of insurance plan=0.75*4000+0.25*8000=$5000