Explain the adverse selection problem that car insurance

Explain the adverse selection problem that car insurance

Mini-case 2

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Answer the following three questions. The answers should not reflect random personal opinions. They should be based on sound economic and finance theory (based on what you have studied during week 3 and 4). The answer to each question must be less than 200 words for the first two questions and less than 250 for the third question (your answers should be concise and to the point; you will be penalized for additional words: 1 point per additional 2 words).

Q1.(30 points) In your own words (you cannot paraphrase), explain the adverse selection problem that car insurance companies face and how they deal with it. Finally, in few words explain whether insurance companies should only insure safe drivers.

Q2. (30 points) Explain in your own words why banks exists (again you cannot paraphrase). Be as specific as you can. Think about what problems they solve.

Q3. (40 points) What are in your opinion the main three causes of the subprime mortgage crisis and the subsequent financial crisis of 2008? (Do not provide more than three possible causes as you will be penalized by 20% for each additional cause you provide). Clearly state why do you think each of the stated causes was instrumental in triggering these events.

Use all the readings assigned for weeks 3 and 4 to formulate your answers. Since these are open answer questions, there is no unique answer to these questions (I also expect students’ answers to be very different). If you read an economic article and borrowed some idea from there, you must cite it. Citations are not counting towards the words limit.