Week Five Schedule
Welcome to Week Five
Welcome to Week Five
Hello Class,
Welcome week five. This lesson explores externalities and asymmetric information. We will examine how governments can regulate markets with asymmetric information through disclosure, conduct, and structure, and how they regulate externalities through user fees/taxes or quotas/standards. Additionally, we will explore risk, benefits, cost, and aversions, and explore concepts of organizational architecture. Please do not forget to post in the weekly discussions.
Thanks
Dr. Hicks
Week Five Discussions
Discussion Topic
- Corporations which borrow may commission credit rating agencies to provide ratings to investors. Standard & Poor’s ratings correlate well with actual defaults. Between 2001 and 2020, the average ten-year default rate was less than 0.4% among investment-grade (BBB and higher) issuers, and over 12.5% among speculative-grade (BB and lower) issuers.
Answer these questions in your discussion
- Explain the asymmetry of information between issuers of securities and potential investors.
- Why is it more cost-effective for issuers of securities rather than potential investors to commission credit ratings? (Hint: information is non-rival.)
- Why is it important that ratings have correlated well with actual defaults?
- By issuing more debt, a corporation may raise the probability of default. Should ratings be fixed or adjusted over time?
Week 5.2 Assignment
Instructions
For your assignment, read the scenario, and complete the questions.
- The National University of Singapore provides outpatient medical insurance to faculty and staff. The plan covers the entire bill for treatment and medicine at an approved general practitioner subject to a copayment of S$5.
- Construct a diagram with quantity of healthcare (including treatment and medicines) on the horizontal axis and marginal benefit and marginal cost of healthcare on the vertical axis. Draw the patient's marginal benefit and marginal cost, and the insurer's marginal cost.
- Compare the level of healthcare that the patient would choose with the level that maximizes the patient's benefit less the insurer's and patient's cost.
- How does the S$5 copayment affect the patient's choice between: (i) a generic drug that costs $25, and (ii) a branded drug that costs $50?
- Suppose that the University replaces the S$5 copayment with a 10% copayment. Use your diagram to illustrate how that would affect the patient's choice of healthcare.
Dr. Reginald Hicks
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