Question 1:

Choose the answers that are true

I. Asymmetric information leads to self-insurance crowd out and is one reason for government intervention in the market

II. Asymmetric information leads to adverse selection and is one reason for government intervention in the market

III. Adverse selection leads sick people to purchase insurance raising the costs and expected payouts, but this is not a problem for insurance companies who just raise prices for everyone.

IV. The underlying market failure in the insurance market is that Marginal Benefit > Marginal Cost of insurance but because of asymmetric information and moral hazard insurance companies can't make a profit in the market.

a - Only II and III are true

b - Only I and IV are true

c - Only II and IV are true

d - Only I and III are true

Question 2:

I. A pooling equilibrium is efficient but there is a transfer of wealth from the low risk to the high risk individuals (from the well to the sick).

II. A separating equilibrium is not efficient because the low risk are not offered full coverage or the high risk have only unaffordable options

III. The government can address the problem of adverse selection by forcing everyone to purchase insurance

IV. If the government provides full insurance to everyone this is an efficient solution

a - Only II and III are true

b - Only I and IV are true

c - Only II and IV are true

d - Only I, II and III are correct

Question 3:

What are the reasons government should/should not be involved in the insurance market

I. If there are people without insurance, this can have high costs on others in society.

II.The administrative costs of government run insurance is significantly higher than the private sector.

III. There is asymmetric information in some markets that lead to no insurance being offered even though the benefit is greater than the cost of providing it

IV. Some people are born unhealthy, so there may need to be a redistribution from the healthy (lucky) to the sick (unlucky).

a - I and II only are true

b - I, III and IV are true

c - I, II and III only are true

d - All are true