Deck 10: Health Insurance

Question 1

If an individual has a 90% chance of having $10,000 in wealth and a 10% chance of having only $9,000 because of a payout for medical care, what is the expected value of wealth of the individual?

A) $9,500
B) $9,900
C) $9,000
D) $9,600

Answer 1

B

Question 2

The greater the rate of decrease of marginal utility for an individual,

A) The more risk averse the individual is and the more willing the individual is to pay premiums above the actuarially fair premium.
B) The less risk averse the individual is and the more willing the individual is to pay premiums above the actuarially fair premium.
C) The more risk averse the individual is and the less willing the individual is to pay premiums above the actuarially fair premium.
D) The less risk averse the individual is and the amount the individual willing is to pay premiums above the actuarially fair premium is constant.

Answer 2

A

Question 3

If an individual had wealth of $10,000 with a corresponding utility of 100.0, a 20% probability of becoming ill resulting in medical costs of $2,000, which lowers utility to 84.4, then the expected utility without insurance is:

A) 92.20
B) 94.78
C) 96.88
D) 97.52

Answer 3

C

Question 4

Assume each person in an insurance pool has a risk function as follows: there is a 25% probability of an $800 loss, a 50% probability of a $700 loss, and a 25% probability of a $400 loss. What is the expected mean loss?

A) $866
B) $700
C) $633
D) $650

Question 5

An insurance company has a payout of health benefits of $100,000. Admin?istrative expenses on top of that are $30,000, and profits are $10,000. The ratio of premiums to benefits is?

A) 1.4
B) 1.3
C) 0.7
D) 1.2

Question 6

The first known health insurance in the United States was implemented by the Granite Cutters Union.

Question 7

An implied condition of pooling risks with insurance is that the event being insured against is under the control of the individuals.

Question 8

As the magnitude of the possible loss increases, the amount of money the individual is willing to pay to avert the possible loss increases.

Question 9

Strictly speaking, the price of insurance is the pure or actuarily fair premium.

Question 10

The existence of an elasticity of demand for medical care in response to insurance is known as moral hazard.

Question 11

Under a community rating, all consumers pay the same premium regardless of his or her actual experience.

Question 12

If total utility increases as wealth increases, the first derivative of the utility function is negative.

Question 13

What are the conditions that must be met in order for the market for insurance to perform efficiently?

Question 14

Describe how each of the following will affect the supply of insurance
A larger pool of insured persons
Lower administration costs for insurance companies
Higher premiums with no change in risk experience
A greater degree of risk aversion on the part of insurers

Question 15

Assume that the loading fee of an insurance policy increases from $800 per policy to $1,000 and that, as a result, consumers reduce their demand for insurance, and therefore their premiums, from $10,500 to $9,500. What is the price elasticity of demand?