Question 1

A large company is trying to decide which of two health insurance plans to offer its employees. Plan A has a high monthly premium and a low deductible, and Plan B has a low monthly premium and a high deductible. Adverse selection is likely to be a bigger problem with

Accepted Answer

Adverse selection occurs when there is an imbalance in information between buyers and sellers, leading to a situation where those most likely to use insurance (those expecting high medical costs) are more inclined to purchase it. Plan A, with its high monthly premiums and low deductible, is more attractive to individuals who anticipate needing significant medical care, as they are more likely to benefit from the lower out-of-pocket costs after the premium. Healthier individuals, who expect fewer medical expenses, are less likely to see the value in paying high premiums, leading to a pool of insured individuals that is more costly for the insurer to cover.

Question 2

Research by economists Martin Hackmann, Amanda Kowalski, and Jonathan Kolstad indicates that the individual mandate provision of the Massachusetts health care program was responsible for a(n) ________ in premiums and the mandate helped to ________ premium increases in subsequent years.

Accepted Answer

The individual mandate provision of the Massachusetts health care program led to a decrease in premiums initially and helped to hold down premium increases in subsequent years, demonstrating the mandate's effectiveness in controlling costs.

Question 3

Asymmetric information contributes to

Accepted Answer

Asymmetric information contributes to both the adverse selection problem and the moral hazard problem. Adverse selection occurs before a transaction when one party has more or better information than the other, leading to potentially poor selection of risks. Moral hazard occurs after a transaction when one party may change their behavior to the detriment of the other, knowing that the other party lacks the information to prevent this behavior.

Question 4

When people purchase health insurance and then change their behavior after the purchase because the insurance protects them from loss, the health insurance market is said to face the problem of

Accepted Answer

Moral hazard occurs when people change their behavior in a riskier way after obtaining insurance because they know the financial risk is covered, leading to potentially higher costs for insurers.

Question 5

With respect to the health insurance market, what is moral hazard?

Accepted Answer

Moral hazard in the context of health insurance refers to the phenomenon where individuals may engage in riskier behavior or utilize more healthcare services than they otherwise would because they know their insurance policy will cover the costs, thus potentially leading to higher costs for the insurance company.

Question 6

Jackson buys an automobile insurance policy and then decides to drive recklessly because he knows he is insured in case he has an accident. This describes the problem of

Accepted Answer

This is an example of moral hazard, which occurs when one party in a transaction takes on more risks because they know they are protected, in this case, by insurance.

Question 7

Scenario 14.1: Marco and Lisette love to play darts, but both suffer from carpal tunnel syndrome due to excessive play. They are considering how many visits to make to the doctor, and both know that they each get $150 of relief from the first visit, and only $45 of additional relief from the second visit. Neither has health insurance and therefore will bear the full cost of medical care. Each visit to the doctor costs $75.
-Refer to Scenario 14.1. Marco's dominant strategy is to schedule ________, and Lisette's dominant strategy is to schedule ________,

Accepted Answer

The dominant strategy for both Marco and Lisette is to schedule 1 visit each because the relief from the first visit ($150) exceeds the cost ($75), making it worthwhile. However, the additional relief from a second visit ($45) does not cover the cost of another visit ($75), making a second visit not beneficial.

Question 8

Scenario 14.1: Marco and Lisette love to play darts, but both suffer from carpal tunnel syndrome due to excessive play. They are considering how many visits to make to the doctor, and both know that they each get $150 of relief from the first visit, and only $45 of additional relief from the second visit. Neither has health insurance and therefore will bear the full cost of medical care. Each visit to the doctor costs $75.
-Refer to Scenario 14.1. Marco's dominant strategy will give him a net benefit of

Accepted Answer

The answer of Scenario 14.1: Marco and Lisette love to...

Question 9

Scenario 14.1: Marco and Lisette love to play darts, but both suffer from carpal tunnel syndrome due to excessive play. They are considering how many visits to make to the doctor, and both know that they each get $150 of relief from the first visit, and only $45 of additional relief from the second visit. Neither has health insurance and therefore will bear the full cost of medical care. Each visit to the doctor costs $75.
-Refer to Scenario 14.1. Lisette's dominant strategy will give her a net benefit of

Accepted Answer

The answer of Scenario 14.1: Marco and Lisette love to...

Question 10

Scenario 14.1: Marco and Lisette love to play darts, but both suffer from carpal tunnel syndrome due to excessive play. They are considering how many visits to make to the doctor, and both know that they each get $150 of relief from the first visit, and only $45 of additional relief from the second visit. Neither has health insurance and therefore will bear the full cost of medical care. Each visit to the doctor costs $75.
-Refer to Scenario 14.1. Marco and Lisette decide to help each other out and agree to split any medical bills from their doctor. With this new arrangement, Marco's dominant strategy is to schedule ________, and Lisette's dominant strategy is to schedule ________,

Accepted Answer

The answer of Scenario 14.1: Marco and Lisette love to...

Question 11

Scenario 14.1: Marco and Lisette love to play darts, but both suffer from carpal tunnel syndrome due to excessive play. They are considering how many visits to make to the doctor, and both know that they each get $150 of relief from the first visit, and only $45 of additional relief from the second visit. Neither has health insurance and therefore will bear the full cost of medical care. Each visit to the doctor costs $75.
-Refer to Scenario 14.1. Marco and Lisette decide to help each other out and agree to split any medical bills from their doctor. With this new arrangement, Marco's dominant strategy will give him a net benefit of

Accepted Answer

Marco's dominant strategy is to visit the doctor once, regardless of Lisette's decision. This gives him a net benefit of $150 - $75 = $75. If Lisette also visits the doctor once, they will split the cost of the second visit, so Marco's net benefit will be $150 - $75/2 = $120. However, if Lisette does not visit the doctor, Marco's net benefit will still be $75. Therefore, Marco's dominant strategy is to visit the doctor once, which gives him a net benefit of $75.

Question 12

Scenario 14.1: Marco and Lisette love to play darts, but both suffer from carpal tunnel syndrome due to excessive play. They are considering how many visits to make to the doctor, and both know that they each get $150 of relief from the first visit, and only $45 of additional relief from the second visit. Neither has health insurance and therefore will bear the full cost of medical care. Each visit to the doctor costs $75.
-Refer to Scenario 14.1. Marco and Lisette decide to help each other out and agree to split any medical bills from their doctor. With this new arrangement, Lisette's dominant strategy will give her a net benefit of

Accepted Answer

Lisette's dominant strategy is to visit the doctor once, regardless of what Marco does. This gives her a net benefit of $150 - $75/2 = $45.

Question 13

Scenario 14.1: Marco and Lisette love to play darts, but both suffer from carpal tunnel syndrome due to excessive play. They are considering how many visits to make to the doctor, and both know that they each get $150 of relief from the first visit, and only $45 of additional relief from the second visit. Neither has health insurance and therefore will bear the full cost of medical care. Each visit to the doctor costs $75.
-Refer to Scenario 14.1. Marco and Lisette decide to help each other out and agree to split any medical bills from their doctor. With this new arrangement, this scenario resembles a

Accepted Answer

This scenario resembles a prisoner's dilemma game because both Marco and Lisette face a situation where they have to decide whether to cooperate (split medical bills) or not, with the best outcome for each depending on the other's decision, similar to the strategic decision-making in a prisoner's dilemma.

Question 14

If insurance companies are able to gather more and better information on their customers, this will

Accepted Answer

Gathering more and better information allows insurance companies to more accurately assess risk (reducing adverse selection) and monitor behavior (reducing moral hazard).

Question 15

Asymmetric information refers to a situation where people who pose the greatest risk to insurers are the ones who buy insurance.

Accepted Answer

Asymmetric information refers to a situation where one party in a transaction has more or superior information compared to another. This concept does not specifically describe the scenario where people who pose the greatest risk are the ones who buy insurance; that scenario is more closely related to the concept of adverse selection.

Question 16

A premium death spiral occurs when healthy people leave an insurance pool, which causes premiums to increase, and that causes more people to leave the pool, which results in even higher premiums.

Accepted Answer

A premium death spiral occurs in insurance when healthier individuals opt out of coverage due to rising premiums, leading to a riskier pool of insureds. This causes insurers to raise premiums further to cover the increased risk, which in turn prompts more healthy individuals to leave, perpetuating the cycle.

Question 17

Governments can address the adverse selection problem in the health insurance market by requiring all its citizens to have health insurance.

Accepted Answer

By mandating that all citizens have health insurance, governments can ensure a more balanced risk pool, reducing the problem of adverse selection where only those who expect to use health insurance are the ones to buy it, leading to higher premiums and potentially destabilizing the insurance market.

Question 18

The very existence of an insurance policy may cause people to behave in a riskier manner, which will increase the moral hazard problem.

Accepted Answer

This phenomenon is known as moral hazard, where individuals or entities may take on riskier behaviors because they are insulated from the consequences by insurance.

Question 19

Insurance creates an incentive for people to consume more health care, and this helps to reduce the moral hazard problem.

Accepted Answer

Insurance can actually increase the moral hazard problem because individuals with insurance may consume more healthcare services than they otherwise would if they were paying the full cost out-of-pocket, knowing that their insurance will cover most of the expenses.

Question 20

Deductibles, copayments, and coinsurance are all ways in which insurance companies can address the problem of moral hazard.

Accepted Answer

Deductibles, copayments, and coinsurance require the insured to share in the cost of healthcare services, which can reduce overutilization and mitigate the problem of moral hazard by giving individuals a financial incentive to consider the cost before seeking care.

Quiz 14: The Economics of Health Insurance and Health Care

A large company is trying to decide which of two health insurance plans to offer its employees. Plan A has a high monthly premium and a low deductible, and Plan B has a low monthly premium and a high deductible. Adverse selection is likely to be a bigger problem with

Research by economists Martin Hackmann, Amanda Kowalski, and Jonathan Kolstad indicates that the individual mandate provision of the Massachusetts health care program was responsible for a(n) in premiums and the mandate helped to premium increases in subsequent years.

Asymmetric information contributes to

When people purchase health insurance and then change their behavior after the purchase because the insurance protects them from loss, the health insurance market is said to face the problem of

With respect to the health insurance market, what is moral hazard?

Jackson buys an automobile insurance policy and then decides to drive recklessly because he knows he is insured in case he has an accident. This describes the problem of

If insurance companies are able to gather more and better information on their customers, this will

Asymmetric information refers to a situation where people who pose the greatest risk to insurers are the ones who buy insurance.

A premium death spiral occurs when healthy people leave an insurance pool, which causes premiums to increase, and that causes more people to leave the pool, which results in even higher premiums.

Governments can address the adverse selection problem in the health insurance market by requiring all its citizens to have health insurance.

The very existence of an insurance policy may cause people to behave in a riskier manner, which will increase the moral hazard problem.

Insurance creates an incentive for people to consume more health care, and this helps to reduce the moral hazard problem.

Deductibles, copayments, and coinsurance are all ways in which insurance companies can address the problem of moral hazard.