Microeconomics, 4e (Hubbard/O’Brien)
Chapter 7 The Economics of Health Care
7.1 The Improving Health of People in the United States
1) Over the past 160 years in the United States, life expectancy
A) has remained fairly constant.
B) has slightly declined.
C) has more than doubled.
D) increased up to the 1950s and then declined for the next 60 years.
2) On average, people in high-income countries ________ than people in low-income countries.
A) have a shorter life expectancy
B) are subject to a higher infant mortality rate
C) are taller
D) are exposed to more severe diseases
3) The average height of adult males in the United States
A) has steadily increased since the early 1700s.
B) has remained very constant since the Civil War.
C) rose significantly beginning in 1830.
D) declined in the mid-1800s before beginning to rise again around 1890.
4) Between 1981 and 2009, the overall mortality rate in the United States
A) decreased by more than 25 percent.
B) slowly but steadily increased.
C) remained fairly constant.
D) was similar to the average rate in most low-income countries.
5) In the United States from 1981 to 2009, deaths from all of the following declined substantially
except
A) cancer.
B) kidney disease.
C) heart attacks.
D) strokes.
6) In the United States from 1981 to 2009, deaths from diabetes increased largely due to the
effects of
A) foreign-produced insulin.
B) stress in the workplace.
C) a larger immigrant population.
D) increasing obesity.
7) The overall decline in death rates in the United States since 1981 was due to all of the
following except
A) a decline in smoking.
B) the decline in the population.
C) the availability of new prescription drugs.
D) new surgical techniques.
8) Better health allows people to work harder, which raises a country’s total income. This
indicates that in effect, better health
A) is a primary cause of price increases.
B) reduces the incentive to work.
C) shifts out a country’s production possibilities frontier.
D) increases consumer surplus.
9) Changes in the health of the average person are an important indicator of changes in the
standard of living.
10) The overall mortality rate in the United States has remained fairly constant for the past 30
years.
11) How can changes over time of the average height of the people in a country help to indicate
the standard of living in a country?
12) How can improvements in health increase a country’s total income?
7.2 Health Care Around the World
1) In the United States in 2009, the percentage of people with private health insurance was about
A) 17%.
B) 29%.
C) 54%.
D) 83%.
2) In the United States in 2009, the percentage of people without any form of health insurance
was about
A) 17%.
B) 29%.
C) 54%.
D) 83%.
3) In the United States in 2010, the percentage of firms that employed more than 200 workers
and offered health insurance as a fringe benefit to the workers was about
A) 29%.
B) 49%.
C) 68%.
D) 99%.
4) Health insurance plans which typically reimburse doctors mainly by paying a flat fee per
patient are known as
A) fee-for-service plans.
B) preferred provider organizations.
C) single-health-payer systems.
D) health maintenance organizations.
5) The health care system in Canada is referred to as ________, and is a system in which the
government provides national health insurance to all Canadian residents.
A) an out-of-pocket system
B) a single-payer health care system
C) a universal health insurance system
D) socialized medicine
6) The health care system in Japan is referred to as ________, under which every resident of
Japan is required to enroll in either a private or the government-provided health insurance
program.
A) an out-of-pocket system
B) a single-payer health care system
C) a universal health insurance system
D) socialized medicine
7) The health care system in the United Kingdom is referred to as ________, under which the
government owns most of the hospitals and employs most of the doctors.
A) an out-of-pocket system
B) a single-payer health care system
C) a universal health insurance system
D) socialized medicine
8) Most doctors and hospitals operate as private businesses in all of the following countries
except
A) Canada.
B) Japan.
C) the United Kingdom.
D) the United States.
9) Health insurance typically pays for most preventive care procedures in all of the following
countries except
A) Canada.
B) Japan.
C) the United Kingdom.
D) the United States.
10) In which of the following countries are substantial co-payments typically required as a part
of the health care system?
A) Canada and the United States
B) Japan and Canada.
C) the United States and Japan
D) the United States and the United Kingdom
11) The largest government-run health care system in the world, with 1.7 million employees, is
in
A) Canada.
B) Japan.
C) the United Kingdom.
D) the United States.
12) Typically, the higher the level of income per person in a country, the higher the level of
spending per person on health care. This relationship between income and spending indicates
that health care is a
A) normal good.
B) inferior good.
C) luxury.
D) necessity.
13) In the United States, health care spending per person based on income per person is
________ the average for most other countries.
A) slightly lower than
B) significantly higher than
C) significantly lower than
D) comparable to
14) Of the following high-income countries, which has the lowest life expectancy at birth?
A) Canada
B) Japan
C) the United Kingdom
D) the United States
15) Of the following high-income countries, which has the highest infant mortality rate?
A) Canada
B) Japan
C) the United Kingdom
D) the United States
16) Of the following high-income countries, which has the lowest mortality ratio for cancer?
A) Canada
B) Japan
C) the United Kingdom
D) the United States
17) A majority of people in the United States have private health insurance.
18) In the United States in 2009, over 90 percent of people without health insurance were below
the age of 34.
19) On average, people in the United States spend a greater percentage of their income on health
care than do people in most other countries.
20) What are the main sources of health insurance in the United States?
21) Briefly explain 4 of the difficulties in making cross-country comparisons in health care
outcomes.
7.3 Information Problems and Externalities in the Market for Health Care
1) A key difficulty facing insurance companies is that people know more about their health than
do insurance companies, and that those people who are seriously ill are the most likely to want to
obtain health insurance. What is this phenomenon called?
A) moral hazard
B) economic irrationality
C) asymmetric information
D) adverse selection
2) An insurance company is likely to attract customers like Clancy who want to purchase
insurance because he knows better that the company that he is more likely to make a claim on a
policy. What is the term used to describe the situation above?
A) moral hazard
B) adverse selection
C) asymmetric information
D) economic irrationality
3) The term that is used to refer to a situation in which one party to an economic transaction has
less information than the other party is
A) inefficient market hypothesis.
B) moral hazard.
C) information disparity.
D) asymmetric information.
4) Which of the following parties is likely to have the most information about the health of an
individual who is trying to purchase a health insurance policy?
A) the company that issues the health insurance policy
B) the individual who is applying for the health insurance policy
C) the employer of the individual who is trying to purchase the health insurance policy
D) All parties in the health insurance market have access to the same level of information.
5) What is adverse selection?
A) It refers to the private, self-interested actions people that people pursue, which when taken
collectively leads to a loss in economic surplus.
B) It refers to the actions people take after they have entered into a transaction that make the
other party to the transaction worse off.
C) It refers to the situation in which one party to a transaction takes advantage of knowing more
than the other party to the transaction.
D) It refers to the actions people take before they enter into a transaction so as to mislead the
other party to the transaction.
6) Consider a used car market in which half the cars are good and half are bad (lemons). A
rational buyer in this market should
A) offer to pay a price equal to the most she would pay for a good car.
B) offer to pay a price equal to the most she would pay for a lemon.
C) offer to pay a price somewhere between the price she would pay for a good car and the price
she would pay for a lemon.
D) save up and buy a new car.
7) Consider a used car market in which half the cars are good and half are bad (lemons). If
buyers are rational, the prices being offered for used cars will result in
A) an equal proportion of a good cars and lemons being sold in an efficient market.
B) a larger proportion of good cars being sold and consequently, consumer surplus is increased.
C) a larger proportion of lemons being sold and consequently, producer surplus is increased.
D) an equal proportion of good cars and lemons being sold in an inefficient market.
8) Consider a used car market in which half the cars are good and half are bad (lemons). Suppose
the average price of a good car is $9,000 and the average price of a lemon is $3,000. If rational
buyers are willing to pay $6,000 for a used car, then sellers will agree to sell mostly the lemons
at this price. What is the term used to describe this situation?
A) moral hazard
B) adverse selection
C) an efficient market
D) economic irrationality
9) Suppose that in a market for used cars, there are good used cars and bad used cars (lemons).
Consumers are willing to pay as much as $6,000 for a good used car but only $1,000 for a lemon.
Sellers of good used cars value their cars at $5,000 each and sellers of lemons value their cars at
$800 each. Buyers cannot tell if a used car is reliable or is a lemon. Based on this information,
what is the likely outcome in the market for used cars?
A) Sellers of good used cars will drop out of the market.
B) Sellers of good used cars will incur losses.
C) Sellers of lemons will drop out of the market.
D) Used cars will sell for $3,000.
10) Adverse selection occurs in the market for used cars because used car buyers
A) have more information than used car sellers.
B) have less information than used car sellers.
C) have less incentive to maintain the value of their cars than new car buyers.
D) tend to have more accidents than new car buyers.
11) If a buyer in an economic transaction has more information than the seller, the buyer benefits
at the expense of the seller. This phenomenon is due to
A) moral hazard.
B) adverse selection.
C) economically irrational behavior.
D) gains from trade.
12) If a state requires all drivers to purchase auto insurance, insurance companies still face the
problem of
A) correctly pricing their insurance.
B) sunk costs.
C) adverse selection.
D) excess demand for their insurance.
13) Which of the following is not an advantage of risk pooling?
A) By insuring large groups as opposed to individuals, health insurance providers reduce adverse
selection.
B) It gives very sick people in the group the same access to health care and to pay the same
premiums as healthy individuals.
C) It is easier for an insurance company to estimate the average number of claims likely to be
filed under a group policy than it is to predict the number of claims likely to be filed under an
individual policy.
D) Individuals who are insured and therefore do not have to pay the full cost of health care
services may be inclined to over-use those services.
14) The Pre-Existing Condition Insurance Plan is a federally administered part of the Affordable
Care Act, and is designed for people with pre-existing medical conditions to obtain insurance. By
offering health insurance to all U.S. citizens with pre-existing medical conditions, the Pre-
Existing Condition Insurance Plan eliminates ________ for both the insurer and the insured, and
eliminates ________ for the issuer of the insurance policy.
A) the principal-agent problem; moral hazard
B) asymmetric information; adverse selection
C) adverse selection; the principal-agent problem
D) moral hazard; adverse selection
15) When people who buy insurance change their behavior after the purchase because they are
protected from loss by the insurance, the insurance market is said to face the problem of
A) moral hazard.
B) adverse selection.
C) asymmetric information.
D) economic irrationality.
16) Which of the following individuals is most likely to purchase a life insurance policy that
pays out an annual income beginning at a certain age until the individual’s death?
A) Ian, who expects to have a short life expectancy because of an illness
B) Bradley who has six young children
C) Avril, a tax attorney who wants to avoid adverse selection
D) Alma, who expects to live a long life, based on her family history
17) One reason why adverse selection problems arise in health insurance markets is that
A) sick people are more likely to want health insurance than healthy people.
B) because of advances in medical technology, people are living longer. These medical advances
are costly and drive up the price of insurance for everyone.
C) the average age of citizens of the United States has increased in recent years, and will
continue to increase over the next 20 to 30 years. As older citizens retire, more and more of their
medical bills will have to be paid by younger workers.
D) fewer men and women are choosing medical careers because of the increase in the cost of
malpractice insurance.
18) The cost of group health insurance is lower than if an individual buys a policy on his own
because
A) the problem of adverse selection is reduced.
B) moral hazard costs of a group tend to move to a low average.
C) it is easier for the company to deny claims from a large group.
D) insuring a group eliminates the problem of buyers having more information than the seller.
19) Which of the following is not an advantage to an insurance company of insuring a large
group of people for health insurance?
A) The characteristics of a large group are likely to reflect those of the entire population.
B) It is easier to accurately predict the number of claims for a group than for an individual.
C) When all group members pay the premium, the problem of moral hazard is reduced.
D) When all group members pay the premium, the problem of adverse selection is reduced.
20) What is moral hazard?
A) It refers to the private, self-interested actions that people pursue, which when taken
collectively leads to a loss in economic surplus.
B) It refers to the actions people take after they have entered into a transaction that makes the
other party to the transaction worse off.
C) It refers to the situation in which one party to a transaction takes advantage of knowing more
than the other party to the transaction.
D) It refers to the actions people take before they enter into a transaction so as to mislead the
other party to the transaction.
21) Automobile insurance companies have a problem with people who buy insurance and then
drive recklessly or take less care to avoid losses after being insured. In other words, the
automobile insurance market is subject to
A) asymmetric information.
B) market signaling.
C) moral hazard.
D) adverse selection.
22) If a fire insurance company requires firms buying fire insurance to install automatic sprinkler
systems, the insurance company is trying to reduce
A) the problem of adverse selection.
B) the moral hazard problem.
C) sunk costs.
D) asymmetric information.
23) Health insurance companies impose deductibles on policies and co-payments on claims
A) to increase sales.
B) to reduce moral hazard problems.
C) to reduces sunk costs.
D) to increase prices.
24) In markets with asymmetric information,
A) moral hazard causes adverse selection which in turn causes asymmetric information.
B) adverse selection causes moral hazard which in turn causes asymmetric information.
C) asymmetric information causes moral hazard and then it causes adverse selection.
D) asymmetric information causes adverse selection and then it causes moral hazard.
25) What is the principal-agent problem?
A) It is a problem caused by a person (principal) who hires an agent to act on his behalf but is
unwilling to delegate authority to the agent to carry out the task in the best possible way.
B) It is a problem caused by agents pursuing their own interests rather than the interests of the
principals who hired them.
C) It is a problem of the power system of boss and subordinate where the boss (principal) exerts
influence over his subordinates (agents) using punishment or threat.
D) It is a problem that exists when a person (principal) has more information about the task than
the agent he hires to perform the task.
26) In the principal-agent relationship, the agent is
A) the owner of a resource that has hired another party to act on his behalf.
B) the person who is placed in control over resources that are not his own, with a contractual
obligation to use these resources in the interests of some other party.
C) the person who is placed in control over resources that are not his own and agrees to
compensate the resource owner in the event of outcomes that do not satisfy the resource owner.
D) the person who places his resources in professional hands in exchange for the professional’s
promise to act on the resource owner’s behalf.