Question

An enterprising student, Jessica, decides she can make money by selling grade insurance to his fellow students. She will pay $750 to any student policyholder who gets an F. Because only 2% of all grades are Fs, Jessica computed that she can break even if she charges students $10 per class. To make a profit, she decides to charge $15. A. What type(s) of asymmetric information problem(s) is her business likely to encounter? Explain. B. Would it help her business if grade insurance was compulsory for everyone? Explain. C. Would compulsory insurance make her business profitable? Explain?

Answer 1

Step-by-step explanation:

Asymmetric information arises when one party possesses greater material knowledge than the other party.

She is offering to pay $500 to a student policy holder who gets an F. But all students can make a cartel and

not study, this will lead to almost all of them getting an F. Students will have more information than

the enterprising student who will assume that only 2% will get F grade.

He would deline the offer because it is unethical and he can easily control who gets an F and who passes.

The students would be more inclined to get an F, this would reduce the grades in his classes and he would be removed as a tutor,

which will ultimately harm his career.