[SOLVED] 4.1. In the market for insurance,

4.1. In the market for insurance, the moral-hazard problem is that encourages .
4.2. While shopping for office equipment, an office manager sees a display of fire extinguishers. After making a single phone call, the manager decides not to buy a fire extinguisher. The manager had called her and asked, “ ?”
4.3. Many professional athletes purchase insurance against career-ending injuries. We expect the insured players to experience (more/fewer) injuries than uninsured players. 4.4 If the single firm providing bicycle theft insurance on campus disappears and is not replaced, we would expect bicycle theft rates on campus to .
4.5. Car insurance increases traffic because insured drivers .
4.6. Selling iPod Insurance. On the campus of Klepto College, half the iPods are expensive (replacement value is $400) and half are cheap (replacement value is $100). There is a 20 percent chance that any particular iPod—expensive or cheap—will be stolen in the next year. Suppose a firm offers iPod-theft insurance for $50 per year: The firm will replace any insured iPod that is stolen. Suppose the firm sells 20 insurance policies.
a. Assume for the moment that the theft rate remains at 20 percent for both types of iPods. The firm’s total revenue equals . The firm’s cost— the money paid out to replace stolen iPods—will be $ to replace expensive iPods and $ to replace cheap iPods, for a total of $ . The insurance firm will make zero economic profit with a price of $ .
b. Is it realistic to assume that the introduction of insurance will not affect the theft rate? Which is a more plausible assumption, that the theft rate will decrease to 10 percent or that it will increase to 30 percent? For the more plausible theft rate, compute the zero-profit insurance price when insurance is purchased exclusively by the owners of expensive iPods.
4.7 Skydiver Question. Several of your friends have offered to take you on a tandem skydiving adventure: Strapped together with a single set of parachutes (main and emergency), you will all jump out of an airplane and then either float to the earth or crash. All your skydiving friends are equally skillful, and none of them has the thrill-seeker gene. You can ask each of them a single question.
a. What’s your question?
b. Provide the answer you’re looking for in a skydiving mate.
4.8. Insurance and Fire Prevention. In a given year, there is a 20 percent chance that a fire in Tom’s house will cost $200,000 in property damage. If Tom spends $5,000 on a fire-prevention program, the probability of a fire would drop to zero.
a. If Tom doesn’t have fire insurance, will he spend the money on the prevention program?
b. If Tom has an insurance policy that covers 80 percent of the property damage from a fire (covering $160,000 of the $200,000 worth of damage), will he spend the money on the prevention program?
4.9. Mandatory Insurance. Consider a hospital with 500 doctors and a perfectly competitive market for malpractice insurance. The demand curve for malpractice insurance is linear and negatively sloped, with a slope of –$50 per case. At the initial price of $3,000, half the hospital’s doctors (250 doctors) buy insurance. The price is just high enough to cover all the costs of providing insurance, including a 50 percent premium to cover costs associated with uninsured doctors. Suppose the hospital makes malpractice insurance mandatory. Predict the new equilibrium.
4.10. Crop Insurance. Consider a state in which farmers are divided equally into two types: high risk and low risk. The average annual crop loss (and possible insurance claim) is $200 for a low-risk farmer and $1,200 for a high-risk farmer.
a. If all farmers were to buy insurance, what is the break-even price for the insurance company? b. Suppose a farmer will purchase insurance only if the price (the annual premium) is no more than 50 percent higher than his or her average crop loss. What is the equilibrium price?
4.11. Safety Rebate from the Insurance Company. In 2010 a leading insurance company started a policy that pays a policyholder a 5 percent rebate on his or her insurance premium in any year in which the driver does not file an insurance claim. For example, a household with an annual premium of $1,200 will get a $60 rebate check each year it does not file a claim. Explain the rationale for the rebate policy. What problem is the policy trying to solve?

Question: 4.1. In the market for insurance,