24) 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) Both good used cars and lemons will sell for $4,500 each.
B) Only lemons will sell, for $800 each.
C) Both good used cars and lemons will sell for $1,000 each.
D) Most used cars offered for sale will be lemons.
25) Health insurance markets have a problem with insuring people who are “poor health risks”
while many people who are “good health risks” do not buy insurance. This problem is an
example of
A) moral hazard.
B) adverse selection.
C) market signaling.
D) asymmetric information.
26) All of the following are ways in which health insurance companies can potentially reduce
adverse selection except
A) by insuring only large groups of people.
B) by lowering the co-payments and deductibles on the policies they issue.
C) by refusing to insure some applicants, for example based on prior health conditions.
D) by finding out as much information about a person applying for insurance, for example
requiring a medical examination.
27) Some economists have argued that certain characteristics of the delivery of health care justify
government intervention. One of these characteristics is
A) health care is a public good.
B) health care is nonrivalrous and nonexcludable.
C) health care generates negative externalities.
D) health care generates positive externalities.
28) Under current tax law individuals do not pay taxes on health insurance benefits they receive
from their employers. As a result
A) the federal government spends more than it receives in tax revenue.
B) individuals are encouraged to want generous health coverage that reduces their incentives to
cut costs.
C) the quality of health care provided is less than it would be if benefits were taxed.
D) politicians are encouraged to raise income and payroll taxes.
29) Adverse selection is a situation in which one party to an economic transaction has less
information than the other party.
30) One consequence of adverse selection in the market for used cars is that most used cars sold
will be lemons.
31) Insurance companies use deductibles and coinsurance to reduce moral hazard.
32) Under current U.S. tax laws individuals do not pay taxes on health insurance benefits they
receive from their employers.
33) The situation in which one party to a transaction takes advantage of knowing more than the
other party to the transaction is known as adverse selection.
34) A doctor pursuing the interests of his patients rather than his own interests is an example of
the principal-agent problem.
35) Adverse selection refers to the actions people take after they have entered into a transaction
that make the other party to the transaction worse off.
36) What is asymmetric information?
37) Two key consequences of asymmetric information are adverse selection and moral hazard.
Define each concept, provide one example of each and explain how the two concepts differ.
38) Suppose you see a 2008 Ford Mustang GT advertised in the local newspaper for $15,000. If
you knew the car was reliable, you would be willing to pay $17,000 for it. If you knew the car
was unreliable, you would only be willing to pay $12,000 for it. Under what circumstances
should you buy the car?
39) How might a company that offers to handle all paperwork involved with a health insurance
claim for a flat fee face the problem of adverse selection?
40) Explain why is it difficult for people who are seriously ill to buy health insurance.
41) How do adverse selection and moral hazard affect the market for insurance?
7.4 The Debate over Health Care Policy in the United States
1) In 2011, health care’s share of gross domestic product in the United States was about
A) 6.5 percent.
B) 17.5 percent.
C) 45 percent.
D) 62.5 percent.
2) In the United States, out-of-pocket spending on health care per person
A) has been rising since 1965.
B) has been falling since 1965.
C) has remained fairly steady since 1965.
D) fell from 1965 through 1995, then began to rise from 1995 to the present.
3) Compared to the United States, health care spending per person in other high-income
countries has been
A) growing at a slower rate.
B) growing at a faster rate.
C) growing at approximately the same rate.
D) declining at approximately the same rate.
4) By the year 2010, health care spending on Medicare, Medicaid, and other U.S. government
programs as a percentage of GDP had reached a level of
A) 2.2 percent.
B) 5.5 percent.
C) 17.5 percent.
D) 21.5 percent.
5) The Congressional Budget Office estimates that ________ account(s) for less than 1 percent
of health care costs in the United States.
A) the aging population
B) uninsured patients receiving treatment in hospital emergency rooms that could have been
provided less expensively at doctor’s offices
C) the payments to settle malpractice lawsuits and the premiums doctors pay for malpractice
insurance
D) advances in medical technology
6) ________ account(s) for between 1 and 4 percent of health care costs in the United States.
A) The aging population
B) Uninsured patients receiving treatments at hospital emergency rooms that could have been
provided less expensively at doctor’s offices
C) The payments to settle malpractice lawsuits and the premiums doctors pay for malpractice
insurance
D) Advances in medical technology
7) Growth in labor productivity in the economy as a whole has been ________ labor productivity
in health care.
A) approximately equal to
B) slightly faster than
C) almost twice as slow as
D) more than twice as fast as
8) Of the following, the most to the rapid rise in health care costs in the United States can be
attributed to
A) the cost of malpractice insurance
B) the cost to treat uninsured patients
C) slow growth in labor productivity in health care
D) the cost of malpractice lawsuit settlements
9) ________ tended to increase spending on health care in the United States.
A) The aging of the U.S. population, rather than advances in medical technology, has
B) Advances in medical technology, rather than the aging of the U.S. population, has
C) The aging of the U.S. population, as well as advances in medical technology, have
D) Neither the aging of the U.S. population, nor advances in medical technology, have
10) In the United States, health care spending on people ________ is six times greater than on
people ________.
A) under age 3; over age 65
B) aged 18 to 24; 25 to 44
C) over age 65; aged 18 to 24
D) over age 65; aged 25 to 44
11) The number of people receiving Medicare is expected to grow to 80 million by the year
A) 2105.
B) 2020.
C) 2030.
D) 2075.
12) The Congressional Budget Office estimates that ________ of the increase in federal
spending on Medicare and Medicaid over the next 75 years will be due to increases in the cost of
providing health care.
A) very little
B) less than half
C) most
D) all
13) In the United States, consumers usually pay less than the true cost of medical treatment
because of ________.
A) adverse selection
B) rising insurance premiums
C) third-party payers
D) rising insurance deductibles
14) Because consumers who have insurance provided by their employers usually only pay a
deductible for a visit to the doctor’s office, they ________ of health care services than they
would if they paid a price that better represented the true cost of providing the service.
A) demand a larger quantity
B) demand a smaller quantity
C) supply a larger quantity
D) supply a smaller quantity
15) Doctors have ________ incentive to control their costs when consumers ________ for a visit
to the doctor’s office.
A) more; only pay a deductible
B) less; only pay a deductible
C) less; pay entirely out of pocket
D) more; have a third-party payer that pays
16) Which of the following is not part of the “individual mandate” provision of the Patient
Protection and Affordable Care Act (PPACA)?
A) Individuals are allowed to opt out of the insurance program if they can prove they have no
serious health issues and do so before the act fully takes effect in the year 2012.
B) By 2018, fines for not having health insurance will be the greater of $895 per person or 2.5
percent of income.
C) Beginning in 2014, individuals who do not acquire health insurance will be subject to a fine.
D) With limited exceptions, every resident of the United States will be required to have health
insurance that meets certain basic requirements.
17) Which of the following is not part of the “state health exchanges” provision of the Patient
Protection and Affordable Care Act (PPACA)?
A) Each state is required to establish an Affordable Insurance Exchange by 2014.
B) Small businesses with fewer than 50 employees will be exempt from being required to
participate in the program.
C) Low-income individuals will be eligible for tax credits to offset the costs of buying health
insurance.
D) Health insurance policies that meet certain specified requirements will be offered by state-run
agencies or by non-profit firms.
18) Under the Small Business Health Options Program (SHOP) provision of the health care plan,
a small firm’s employees would be
A) pooled with the employees of a major corporation.
B) pooled with the employees of other small firms.
C) pooled with government employees.
D) exempt from being required to carry health insurance.
19) Which of the following is not part of the “regulation of health insurance” provision of the
Patient Protection and Affordable Care Act (PPACA)?
A) Individuals with pre-existing medical conditions will be able to acquire health insurance.
B) All policies must provide coverage for dependant children up to age 26.
C) Lifetime dollar maximums on coverage will be prohibited.
D) Limits on the size of deductibles and on waiting periods before coverage takes effect will be
eliminated.
20) Which of the following is not part of the “taxes” provision of the Patient Protection and
Affordable Care Act (PPACA)?
A) Pharmaceutical firms and health insurance firms will pay a new taxes.
B) Investors earning more than $200,000 will pay a new tax on their investment income.
C) Beginning in 2018, all taxes on employer-provided health insurance plans will be reduced or
eliminated.
D) Workers earning more than $200,000 will have their share of the Medicare payroll tax
increase.
21) The Congressional Budget Office estimates that the Patient Protection and Affordable Care
Act (PPACA) will increase government spending
A) by just under $1 trillion over 10 years.
B) by more than the additional taxes and fees enacted under the law will bring in.
C) by less than $50 billion over the next decade.
D) by more than $20 trillion dollars over the next 5 years.
22) The Patient Protection and Affordable Care Act (PPACA) is scheduled ________, at which
point more than 30 million additional individuals are expected to have health care coverage.
A) to be phased in over the next 20 years
B) to be fully implemented by 2019
C) to be phased out by 2015
D) to be completely in place by 2012
23) Some economists and policymakers who are in favor of government-provided health care
believe that providing health care will
A) generate additional moral hazard.
B) create negative externalities.
C) reduce asymmetric information.
D) generate more adverse selection.
24) Economists who support market-based reforms for health care believe that increased
competition among providers of health care would
A) decrease costs but decrease economic efficiency.
B) decrease costs and increase economic efficiency.
C) increase costs but increase economic efficiency.
D) increase costs and decrease economic efficiency.
25) A goal of ________ is to give patients an incentive to pay more attention to the prices of
medical services. This would tend to increase economic efficiency by decreasing the costs of
medical services
A) the Patient Protection and Affordable Care Act (PPACA)
B) market-based reforms of the health care system
C) government-provided health care
D) socialized medicine
26) Most employees ________ on the value of health insurance provided by employers, and
most people ________ when buying individual health insurance policies.
A) pay taxes; get a tax break
B) pay taxes; do not get a tax break
C) do not pay taxes; get a tax break
D) do not pay taxes ; do not get a tax break
27) About ________ of pharmaceutical patents are issued to U.S. firms.
A) 10 percent
B) one-half
C) two-thirds
D) 90 percent
28) About ________ of research on new medicines is carried out in the United States. U.S.
A) 10 percent
B) one-half
C) two-thirds
D) 90 percent
29) Economists John Cogan, R. Glenn Hubbard, and Daniel Kessler have estimated that
________ the tax preference for employer-provided health insurance would reduce spending by
people enrolled in these programs by 33 percent.
A) enacting
B) doubling
C) cutting in half
D) repealing
30) The individual mandate provision of the PPACA requires
A) every U.S. resident to have health insurance.
B) every U.S. company to provide health insurance to its employees.
C) every employed person to pay for his or her own health insurance.
D) every private insurance company to provide free health care to its current policy holders.
31) Some economists believe that by making health care coverage mandatory for all individuals,
the ________ for medical services will likely increase, which will ________ the costs of health
care.
A) demand; increase
B) demand; decrease
C) supply; increase
D) demand and supply; decrease
32) Over the past 45 years in the United States, ________ amounts of production have been
devoted to health care, and consumers have been paying ________ of the cost.
A) increasing; more
B) increasing; less
C) decreasing; more
D) decreasing; less
33) The rising cost of uninsured patients receiving treatment at hospital emergency rooms is one
of the leading causes of the increase in health care spending as a percentage of GDP in the
United States.
34) “Cost disease” refers to the tendency for high productivity in the service sector to lead to
lower costs in those industries.
35) Under the Patient Protection and Affordable Care Act (PPACA), individuals who do not
have health insurance will be subject to a fine.
36) Under the Patient Protection and Affordable Care Act (PPACA), every company with more
than 200 employees must offer health insurance to its employees and must automatically enroll
them in the plan.
37) Those who favor changes in the market for health care that would make it more like the
markets for other goods and services favor what are generally known as market-based reforms.
38) In most circumstances, employees pay taxes on the value of health insurance their employers
provide them.
39) In what ways do economists and policymakers who believe that the federal government
should have a larger role in the health care system criticize the Patient Protection and Affordable
Care Act (PPACA)?
40) In what ways do economists and policymakers who believe that market-based reforms are
the key to improving the health care system criticize the Patient Protection and Affordable Care
Act (PPACA)?
41) A key provision of the Patient Protection and Affordable Care Act (PPACA) is the Small
Business Health Options Program (SHOP). Briefly describe the SHOP provision.