Question 1

One prominent U.S. study found that when people face ____________ for their health insurance, they consume about ________ medical care than people who have complete insurance.

Accepted Answer

The study referred to is likely the RAND Health Insurance Experiment, which found that people with cost-sharing (moderate deductibles and copayments) consume about one-third less medical care than those with complete coverage, without a significant difference in health outcomes for the average person.

Question 2

How do insurance companies reduce the risk of moral hazard?

Accepted Answer

Insurance companies reduce the risk of moral hazard through investigation and monitoring to ensure that claims are legitimate and to discourage fraudulent or exaggerated claims.

Question 3

Martha has decided to purchase a new home constructed by Crown Builders. In addition to Crown Builder's good reputation in the industry, which of the following likely influenced Martha's decision to purchase a new home?

Accepted Answer

A no-charge service contract covering the first year would likely be a significant factor in Martha's decision, as it provides assurance of support and maintenance without additional cost, enhancing the appeal of purchasing a new home.

Question 4

The major problems caused by imperfect information in insurance markets are

Accepted Answer

Moral hazard occurs when the behavior of the insured party changes in a way that raises costs for the insurer because the insured party is less careful about avoiding the insured risk, knowing they have coverage. Adverse selection happens when there is asymmetric information between the insurer and the insured before the transaction occurs, leading to the insurer covering those more likely to need the insurance, thus raising costs. Both are primary issues in insurance markets related to imperfect information.

Question 5

One strategy insurance companies have adopted to reduce moral hazard is to require an injured party to pay a _______________ .

Accepted Answer

Insurance companies often require an injured party to pay a deductible as a strategy to reduce moral hazard. This means the insured must cover a portion of the loss themselves before the insurance coverage kicks in, encouraging them to act more cautiously since they bear some of the financial risk.

Question 6

Changes in weather patterns are increasing administrative costs for insurance companies. These added costs often exceed the amount of the premiums coming in and claim payments going out. To address this problem, insurance companies typically

Accepted Answer

Insurance companies typically build up their reserves to ensure they have enough funds to cover future claims, especially when facing increased costs due to changes in weather patterns.

Question 7

____________________________ often have deductibles, which is an amount that the insurance policyholders must pay out of their own pocket ____________________ .

Accepted Answer

Deductibles are a common feature in various types of insurance policies, where the policyholder must pay a specified amount out of pocket before the insurance company pays its portion of the claim. This concept does not specifically apply to pension or retirement insurance plans in the way described by the other options.

Question 8

The chef at a high-end French cuisine restaurant has accepted a job on a cruise liner. The restaurant owner must advertise for a replacement chef, but is concerned about reducing the amount of imperfect information respondents to the career ad will provide. This concern can best be addressed by

Accepted Answer

Requiring current resumes and recommendations provides the restaurant owner with more information about the potential chef's qualifications and experience, reducing the amount of imperfect information respondents to the career ad will provide.

Question 9

Banks are required by law to pay a small fraction of their deposits to the _______________, which goes into a __________ fund that is used to repay depositors their money if the bank should go bankrupt.

Accepted Answer

Banks are required by law to pay a small fraction of their deposits to the Federal Deposit Insurance Corporation (FDIC), which goes into a deposit insurance fund. This fund is used to repay depositors their money if the bank should go bankrupt.

Question 10

Why would a bank require a borrower to have collateral or a cosigner before agreeing to lend funds?

Accepted Answer

Collateral or a cosigner provides a bank with a form of security or guarantee that the loan will be repaid. In cases where the borrower fails to repay the loan, the bank can seize the collateral or demand payment from the cosigner. This reduces the bank's risk associated with lending to individuals or entities about whom they may not have complete information.

Question 11

Why has there been a shift away from the traditional fee-for-service structure in the U.S. health care?

Accepted Answer

The shift away from the traditional fee-for-service structure in U.S. health care is primarily aimed at reducing the incentives and moral hazards associated with providing unnecessary additional services merely to increase income. This model encourages more responsible and cost-effective care.

Question 12

In the U.S., individuals often pay a small portion of their earnings into a state _________________ pooled fund that will compensate them if they are injured on the job.

Accepted Answer

Workman's compensation insurance is the correct answer because it is specifically designed to provide benefits to workers who are injured or become ill as a direct result of their job.

Question 13

When the level of insurance premiums that someone pays is equal to the amount that an average person in that risk group would collect in insurance payments, the level of insurance

Accepted Answer

The answer of When the level of insurance premiums that...

Question 14

Individuals who have a small amount deducted from their paychecks to contribute into a pooled fund used to pay benefits for a period of time if they are laid-off have contributed to

Accepted Answer

Unemployment insurance funds are designed to provide financial assistance to individuals who lose their jobs through no fault of their own, such as being laid off. Workers contribute to this fund through deductions from their paychecks, which then provides them with a temporary source of income if they become unemployed.

Question 15

Jeremy is an 18 year old college student with no prior credit history, who still lives at home. He will have a part-time job while he is attending college and has applied for a car loan. In these circumstances, the bank's loan officer will most likely approve the loan if Jeremy can

Accepted Answer

A cosigner with an established credit history can provide the additional assurance the bank needs to approve the loan, especially since Jeremy has no prior credit history.

Question 16

An insurance company is likely to believe that having a major accident is a signal of being a _____________, and thus try to _________________.

Accepted Answer

Insurance companies typically view drivers who have had major accidents as high-risk. To mitigate their risk, they often raise the insurance premiums for these drivers rather than taking other actions like denying coverage, compelling course completion, or reducing coverage amounts.

Question 17

In the U.S., the law requires employers offering pension plans for their employees to pay a small fraction of those pension contributions to the _________________________, which will pay at least some pension benefits to workers if a company goes bankrupt and cannot pay the pensions it has promised.

Accepted Answer

The Pension Benefit Guaranty Corporation (PBGC) is the correct answer because it is a federal agency created by the Employee Retirement Income Security Act of 1974 (ERISA) to protect pension benefits in private-sector defined benefit plans. If a company cannot meet its pension obligations, the PBGC steps in to ensure that employees still receive their pensions, up to certain limits.

Question 18

What name is given to an organization that receives a fixed amount per each person enrolled in a health care plan, regardless of how many services are provided?

Accepted Answer

Health Maintenance Organizations (HMOs) operate on a prepaid basis, where they receive a fixed amount per enrollee, regardless of the number of services each person uses. This model emphasizes preventive care to reduce the need for costly medical services.

Question 19

_________________ in the insurance industry prevents premiums from being much higher than the___________ level in the long term.

Accepted Answer

Competition in the insurance industry ensures that premiums do not significantly exceed the actuarially fair level over the long term. This is because competition among insurers drives them to offer premiums that are close to the expected cost of claims (actuarially fair) to attract customers, preventing any single insurer from charging excessively high premiums.

Question 20

Guarantees, warranties, and service contracts are all examples of

Accepted Answer

Guarantees, warranties, and service contracts are forms of explicit reassurance provided by sellers to buyers, indicating the quality and reliability of their products or services, and often covering repairs or replacements.

Quiz 16: Information, Risk, and Insurance

One prominent U.S. study found that when people face ____ for their health insurance, they consume about medical care than people who have complete insurance.