Equal treatment of men and women is one of the key tenets of the EU.
In Britain, the average insurance claim for an 18-year-old woman is about PS2,700, compared to PS4,700 for an 18-yearold man.
Women paid less for insurance because they were less expensive.
The Lemons Problem explains the idea of moral hazard.
The marginal principle can be used to describe page 646 optimal search by consumers.
The notion of adverse selection for MyLab Economics helps you master each objective and study more efficiently.
The quality of the product is more important than the price in the used car market.
Buyers know more about the risks they face than sellers in the life insurance market.
The model of supply and demand is based on several assumptions, one of which is that buyers and sellers have enough information to make informed choices.
Markets operate smoothly in a world of fully informed buyers and sellers.
Some goods will be sold in very small numbers or not sold at all in a world with imperfect information.
Buyers and sellers will use resources to make better decisions.
Three economists were awarded the 2001 Nobel Prize in economics for their work on the effects of imperfect information on markets.
Explain adverse selection for buyers.
There are two types of cars, low quality and high quality.
A low-quality car, also known as a "lemon", breaks down frequently and has high repair costs.
A high-quality car is reliable and has low repair costs.
People can't distinguish between lemons and plums.
The information gleaned from this kind of inspection is not enough to determine the quality of the car, even though a buyer can get some information about a particular car by looking at it and taking it for a test drive.
A person who sells a car after owning it for a while knows whether the car is a lemon or a plum.
There will be a single market for used cars because buyers and sellers can't tell the difference between lemons and plums.
Goods of different Uninformed Buyers and Knowledgeable sellers are sold at the same price.
The typical buyer would pay $4,000 for a plum and $2,000 for a lemon.
The buyer is willing to pay less for a lemon because it is less reliable.
A lemon is a reasonable car for someone willing to put up with the hassle.
Someone who pays $2,000 and gets a lemon is just as happy as someone who pays $4,000 and gets a plum.
When there is imperfect information, consumer expectations play a key role.
Buyers expect a 50% split between the two types of cars.
A buyer in the mixed market is willing to pay an average of $3,000 for two types of cars.
A buyer is willing to pay $3,000 for a 50% chance of getting a plum or lemon.
The current owner of a used car knows the difference between a lemon and a plum.
No lemons will be supplied if the minimum supply price is less than $500.
Lemons are worth less to their current owners than the minimum price would suggest.
The price increases the number of lemons supplied.
No plums will be supplied if the minimum supply price is less than $2,500.
The law of supply states that the larger the number of plums supplied, the higher the price of used cars will be.
If buyers think there is a chance of getting a lemon or a plum, they will pay more for a used car.
Consumers are willing to pay $2,000 for a used car if they think that all cars on the market will be lemons.
In the first column, we assume buyers have differing expectations about the quality of used cars.
The typical buyer will pay $3,000 for a used car if they expect a 50% split between lemons and plums.
Consumers underestimate the chance of getting a lemon.
The experiences of 100 consumers show that the actual chance of getting a lemon is 80 percent, not 50 percent.
They will become more pessimistic about the used-car market.
They assume that the used cars on the market will be lemons.
The typical buyer will be willing to pay $2,000 for a used car.
Consumers' pessimism is justified because all the used cars will be lemons.
The equilibrium price of used cars is $2,000 because consumers' expectations are not realistic.
The second column of Table 29.1 shows the equilibrium in the used-car market.
Every buyer will get a lemon because no plums are bought or sold.
Each consumer gets exactly what they pay for, because people are willing to pay $2,000 for a mediocre car.
The asymmetric information in the market creates a downward spiral of price and quality that the market must choose from.
The price consum ers are willing to pay is affected by the presence of low-quality goods on the market.
The average quality of goods on the market decreases when the price goes down.
The price consumers are willing to pay is affected by the average quality of goods on the market.
The downward spiral will continue until all the cars on the market are lemons.
The disappearance of plums from a hypothetical used-car market is extreme.
The plums disappeared from the market because informed plum owners decided to keep their cars rather than sell them at a relatively low price in the used-car market.
If the minimum supply price of plums was less than $2,000, this outcome would change.
The situation that leads to a thin market is shown in Figure 29.2.
The minimum supply price for plums is $1,833, and the quantity of plums supplied increases with the price of used cars.
Consumers assume all cars for sale will be lemons.
Consumers are willing to pay $2,000 for a used car.
Some plums will be supplied at a price of $2,000 because the minimum supply price is less than the willingness to pay for a lemon.
Pessimism is not an equilibrium because some buyers will get plums when they expect lemons.
The first column of Table 29.2 shows this.
If buyers think only lemons will be sold, they will pay $2,000 for a used car.
Consumers are willing to pay $2,500 for a used car if they think they have a 25 percent chance of getting a plum.
He had injuries that prevented him from playing.
The new team has less information.
The team can check league records to see how long the pitcher has been on the disabled list, but these measures do not eliminate asymmetric information.
The original team has years of experience with the pitcher and has better information about his physical health.
Incentives for a team to outbid another team for a pitcher are considered.
If the market price for pitchers is $1 million per year, a pitcher who is currently with the Detroit Tigers is offered this salary by another team.
If the Tigers think the pitcher will spend a lot of time recovering from injuries, they won't try to outbid the other team for the pitcher.
The pitcher will be worth more than $1 million to the Tigers if they think he will be injury-free and productive.
Baseball teams are more likely to switch teams if there is an injury to a pitcher.
A player who has played in the major leagues for 6 years has many "lemons" on the used-pitcher market.
The market for the option of becoming a free agent and offering his services to the baseball players playing other positions does not suffer from the highest bidder.
A player is more likely to switch teams if the new team has a higher salary than the original team.
It is easier for other teams to detect a puzzling fea performance.
You may think it's weird to compare baseball to pitchers who don't get injured.
People in basebal don't think pitchers use used cars.
The pitchers who switch teams spend 28 days a season comparing the two markets.
For pitchers who don't manage a free-agent camp, it takes only 5 days for teams to find them.
"We are lemons; many are injury-free and are valuable additions to want to get players off the lot," said the pitcher.
We want to make a deal.
It takes longer to recover from injuries when you switch pitchers, as they spend five camps can you go into where you can look at a player?
asymmetric information and adverse selection explain the puzzling feature of the free-agent market.
Consumer expectations about the chances of getting two types of cars are realized.
Consumers expect one of every four cars to be a plum.
Let's assume each consumer is willing to pay $2,500 for a used car.
Consumers are willing to pay more for a lemon because there is a small chance of getting a plum.
25 percent of the cars sold are plums and 75 percent are lemons, which is consistent with consumers' expectations.
The second column of Table 29.2 contains this.
Two predictions are made by the lemons model.
The presence of low-quality goods in a market will reduce the number of high-quality goods in the market and may even eliminate them.
It is important to distinguish between low-quality and high-quality goods.
Studies of the market for used pickup trucks have provided mixed results, but it appears that those sold on the market are just as reliable as those that remain with their current owners.
The second implication of the theory of lemons is that people acquire information and develop effective means to deal with asymmetric information.
There is a lemons problem for trucks that are at least 10 years old.
Old trucks that are sold have a higher repair cost than trucks that remain with their current owners.
Old trucks that are sold have a higher chance of needing repairs.
There are strong incentives for buyers in a market with asymmetric information.
Consumers are willing to pay $4,000 for a plum if the price of a used car is $2,500.
There is a gap between the willingness to pay for a plum and the price in the mixed market.
A person who owns a high-quality car may not be willing to sell it for $2,500, but a buyer is willing to pay $4,000.
The challenge is to find a high-quality car in a mixed market.
One in four buyers pay $2,500 for a plum in the thin market.
The more information a buyer has, the more likely they are to pick a plum from the cars in the mixed market.
A buyer might be able to identify plums in a market.
The buyer could purchase a plum worth $4,000 at the prevailing price of $2,500, generating a gain of $1,500.
A buyer can get information about a car by taking it to a mechanic.
A buyer can get information about the reliability of different models from magazines and the internet.
The chances of getting a high quality car are improved by consulting these information sources.
Information on individual cars, including their accident histories, can be found on Carfax.com.
There is a problem of asymmetric information in consumer goods such as cars.
Consumers can't easily determine the quality of service they will receive from an auto repair shop, a landscaper, or a plumbing company.
Some organizations give information about firms that provide services to consumers.
ValueStar uses customer satisfaction surveys to determine how well a firm does relative to its competitors in providing quality service.
To earn the right to display a Customer-Rated seal from ValueStar, a firm must prove that it has all the required licenses and insurance and agree to pay for a survey of its past customers.
Consumer surveys are used to calculate a company's satisfaction score.
A company with a score of at least 85 out of 100 can display a Customer-Rated Gold seal for a year.
All kinds of contractors and household service providers are rated by servicemagic.com in New York City.
Online consumers rate online sellers.
On eBay, buyers must rely on sellers to honestly disclose the quality of the goods they are auctioning and to promptly ship them once a consumer pays.
Buyers help other buyers distinguish good from bad sellers on eBay by rating them online with stars, indicating their satisfaction with their transactions.
People who buy secondhand books give the same information.
The lemons problem can be solved by used-car sellers.
If a plum owner convinces a buyer that his or her car is a plum and then sells it for $4,000 instead of $2,500, the seller's gain is $1,500.
If the car turns out to be a lemon, the seller could promise to refund the $4,000 price.
The buyer won't ask for a refund because the car is a plum and the seller will be happy with the transaction.
The seller would cover any repair costs for a year.
The buyer and seller will be happy with the transaction because the car is a plum and there won't be any extraordinary costs.
Many states require auto manufacturers to buy back cars that experience frequent problems in the first year of use.
The average sugar content at the time of harvest was below the industry standard.
Stores were not willing to pay more for California fruit because of the large number of lemons.
The price of California fruit was affected by the presence of immature fruit in the mixed market.
The cost of production of mature fruit is higher than the cost of production of immature fruit.
The result is similar to how low used-car prices decrease the number of high-quality used cars on the market.
In general, adverse selection led to low prices and a relatively large Kiwifruit is subject to imperfect information because buyers volume of low-quality fruit from California.
The order to address the lemon-kiwi problem is based on the level of sweetness at the time of consumption.
The federal is determined by the fruit's maturity and its sugar content at the time order.
After age quality of California fruit increased, the price of the fruit increased.
There is a gap between California and New Zealand prices at harvest time and fruit that is picked early has a low sugar content.
Four times for the same problem or have been in the mechanic's shop for at least 30 calendar days in the first year following purchase the maturity levels of the fruit varied.
Lemons can cross state lines without a paper trail.
The interstate commerce in lemons has led to new laws in some states requiring the branding of lemons on vehicle titles to follow the car when it crosses state lines.
We have explored the effects of asymmetric information on adverse selection.
There are the same sorts of problems when buyers are more knowledgeable than sellers.
Insurance is an example of superior knowledge on the demand side of the market.
A person who buys an insurance policy knows more about his or her risks than the insurance company does.
When you buy an auto insurance policy, you know more about your driving habits than the insurance company.
Insurance markets suffer from the adverse-selection problem because insurance companies get an adverse or undesirable selection of customers.
Consider health insurance provided to individual consumers as an example of the information problems in the market for insurance.
There are two types of consumers, low-cost consumers with relatively low medical expenses of $2,000 per year and high cost consumers with relatively high medical expenses of $6,000 per year.
The amount a consumer is willing to pay for an insurance policy covering all medical expenses increases with the anticipated medical expenses, so high-cost people are willing to pay more for health insurance.
The insurance company can't differentiate between high-cost and low-cost people, but it can pick a price for its coverage.
Let's assume that the only cost for the insurance company is the medical bills it pays for its customers.
Let's assume the insurance company sets the price equal to its average cost per customer and the total medical bills paid by the insurance company divided by the number of customers.
The basic results are unaffected by these assumptions.
Half the population is high cost and the other half is low cost.
Let's assume that the mix of insurance buyers will be the same as the population mix, and that the insurance company is somewhat naive.
The insurance company assumes that half of its customers will be high cost and the other half will be low cost.
The average cost per customer is $4,000, with an average of $2,000 for each low-cost customer and $6,000 for each high-cost customer.
The insurance market has asymmetric information because potential buyers know what type of customer they are, either low cost or high cost.
The high-cost people have larger benefits from having medical insurance than the low-cost people.
The average cost of insurance and its price is $4,000 if insurance companies assume there will be a 50% split between high-cost and low-cost customers.
The average cost and price is $6,000 if insurance companies think all buyers will be high-cost.
Firms assume 50% of their customers in the first column.
If sellers expect a 50% split between the two types, the average cost per customer is $4,000, and that's the price they charge for medical insurance.
Insurance companies underestimate the number of customers with large medical bills.
The high-cost customers are 75 percent and the average cost is $5,000.
The firm will lose money because the company's average cost is more than the price.
Insurance companies become very pessimistic after observing the outcome in the first column.
They think that all of their customers will be high cost.
The pessimistic price is the average cost per customer and the average cost per high-cost customer.
The company's pessimism is justified because all the customers will be high-cost people.
The equi librium is shown in the second column.
The domination of the insurance market by high-cost people is an example of the adverse-selection problem.
sellers have to choose from an undesirable or adverse selection of consumers.
The average cost of service is pulled up by the presence of high-cost consumers in the market.
The number of low-cost consumers who purchase insurance decreases as a result of the increase in price.
The average cost of insurance is affected by the number of low-cost consumers.
The upward spiral will continue until all insurance customers are high-cost people.
An example of health insurance shows that high-cost people buy it.
A thin market with a relatively small number of low-cost people buying insurance is a more realistic outcome.
The adverse-selection problem is still present as long as insurance companies can't distinguish between low-cost and high-cost people.
Group insurance plans are used by insurance companies.
Enrolling all the employees of an organization in one or two insurance plans ensures that they join the pool of consumers.
The break-even price for group insurance is $6,000, and it would generate a 50% mix of low-cost and high-cost customers.
When a firm sells insurance to individuals, the low-cost people have an incentive to go without insurance, leading to adverse-selection problems and higher prices.
Depending on the past, they charge different prices to different firms for different things.
Depending on the low price for its employees' health insurance, a firm pays an ance to different firms.
Firms get an incentive past medical bills of their employees if they have an experience rating.
Firms have an incentive to not hire applicants with health problems.
A firm that hires a worker with above-average medical costs will pay a higher price for its group insurance under experience rating.
Many low cost consumers who are not eligible for a group plan will not carry insurance because of asymmetric information in the insurance market.
Many consumers don't have insurance.
The problem of the uninsured is caused by this.
About 14 percent of the US population did not have health insurance in 2008.
70 percent of working-age people have private insurance, and another 10 percent have some sort of government insurance, leaving 20 percent without health insurance.
The uninsured are the people and their families who do not receive insurance through their employers, are unemployed or between jobs, or are poor but do not qualify for Medicaid.
The uninsured usually don't get preventative care, but they do get care for medical emergencies.
Congress approved legislation in 2010 to regulate the nation's health insurance markets and reduce the number of uninsured people.
The new law will make it illegal for insurance companies to deny coverage based on preexisting conditions.
The law imposes penalties on people who remain uncovered and requires individuals to get health insurance.
Penalties are imposed on employers that do not provide insurance for their employees.
The law provides subsidies and tax credits to help small businesses and low-income individuals pay for insurance.
The number of uninsured citizens is expected to be reduced by the law.
The markets for other types of insurance, including life insurance, home insurance for theft and property damage, and automobile insurance all have the same logic of adverse selection.
High-risk individuals are more likely to buy insurance if they know more about their risks.
Life insurance companies try to distinguish between high-risk and low-risk people with physical exams in order to get a broader base of consumers.
The adverse-selection problem persists because the com panies can't distinguish between high-risk and low-risk people.
The Genetic Information Non-Discrimination Act is designed to protect people from genetic discrimination.
It is against the law for health insurance providers to use genetic information in making decisions.
When an employer has fewer than 15 employees, GINA does not apply.
GINA does not protect against genetic discrimination in life insurance.
Insurance companies could use genetic testing to estimate the cost of health insurance for each customer.
This new information would increase insurance prices for high-cost customers and decrease prices for low-cost customers.
The U.S. National Library of Medicine has a guide to understanding genetic conditions.
Explain the idea of moral hazard.
The answer is yes.
Part of the cost of an undesirable outcome will be paid by the insurance companies, which causes people to take greater risks.
She would buy a fire extinguisher if she had to pay for fire damage.
She doesn't buy a fire extinguisher because her homeowner's insurance covers property damage from fires.
He would drive very carefully if he had to pay for all the repairs after a collision.
He drives fast and recklessly because his auto insurance covers some of the repair costs.