Exploring Insurance

10. a) Why is there no private insurance for unemployment?
b) There is no market that insures against mentally or physically handicapped babies. Yet when people have children, there is a significant risk that they will have a child with such a handicap. How can you explain this gap in insurance coverage?
c) In Britain, virtually all blood used in transfusions is donated. In the United States, much is purchased. Typical sellers include college students, slum dwellers, and drug addicts--all groups that can use the extra cash. The United States has had a much harder time keeping its blood supply free of infectious disease than has had Britain. Why?

11. Some life insurance will not pay if the cause of death is suicide within two years of buying the policy, and others will never pay for suicide. Why? No life insurance will pay if the cause of death is a world war. Why?

12. Stew D. Much is an enterprising student who is always trying to make a buck. He decides to sell grade insurance to his fellow students. He will pay $500 to any student policyholder who gets an F. Because only 2% of all grades are Fs, Stew computes that he can break even if he charges students $10 per class. To make a profit, he decides to charge $15.

a) Is his arithmetic correct in computing the break-even point? (Ignore other problems.)
b) Will he face a free rider problem? Explain.
c) Will he face a screening problem caused by adverse selection? Explain.
d) Will he have a problem with moral hazard? Explain.

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