Question 1

Which of the following types of reimbursement would hospitals support?

Accepted Answer

Hospitals would prefer service-benefits because insurance companies would reimburse hospitals directly for the cost of treatment.Indemnity benefits reimburse only the patients and up to a fixed amount,causing patients to actively seek to minimize cost.

Question 2

Suppose there are two types of people in an insurance market: high and low risks.The high-risk person is sick 10% of the time and the low-risk person is sick 5% of the time.The probability that any individual is high risk is 40%.Upon getting sick,an individual loses $10,000 in medical expenses.What are the actuarially fair premiums for the types?

Accepted Answer

The actuarially fair premiums are equivalent to each individual's expected loss.For a high premium,(high)= $10,000(Pr[ sick | high ])= $10,000(.10)= $1,000.For a low premium (low)= $10,000*(Pr[ sick | low ])= $10,000(.05)= $500.

Question 3

In the figure above, the change in insurance coverage causes a consumer's private benefits to increase (area under the demand curve) by:

Accepted Answer

C

Question 4

A public option in the health insurance market has been proposed as a remedy to the increasing cost of health care.Critics state that a public option requiring all citizens to purchase health insurance would decrease health insurance premiums on average by mitigating

Accepted Answer

Forcing all citizens to purchase health insurance prevents a lemons' market for health insurance by removing adverse selection.

Question 5

As it applies to health insurance,the adverse selection problem is the tendency for:

Accepted Answer

Healthy individuals with insurance are essentially subsidizing unhealthy people with insurance.Further,healthy people realized that purchasing health insurance is more expensive than insuring themselves by saving the expected cost of care.Thus,only sick people buy insurance.

Question 6

Purchasing additional medical services because you are covered by health insurance is an illustration of

Accepted Answer

A failure of the market for externalities is an example of moral hazard.People know they will not have to face the loss if a disaster is to arise because the government will cover them and thus they do not see the benefit of insurance.

Question 7

For a risk-averse consumer

Accepted Answer

Only a risk-averse agent buys insurance.For a risk-averse agent,the expected utility of wealth is less than the utility of expected wealth.For this reason,a risk averse agent is willing to pay a certain loss rather than face the risk of an uncertain loss with the same expected value as the certain loss.

Question 8

Use the following figure for questions 8 through 10

Suppose that Q₀ = 10 office visits,Q₁ = 20 office visits,P₀ = 10,and P₁ = 2.The increased expenditures due to insurance are:

Accepted Answer

The total expenditure before insurance was Q0*P0 = $100.By only paying 20% of the cost, the patient sees the $10 cost as a $2 cost and increases their quantity to 20 office visits, but the total cost is really at the old price of $10, which would imply a total cost of (10)(20) = 200. Therefore, the increase in expenditures is $100.

Question 9

It is flu season,and you are trying to decide if you should get a flu shot.When you are healthy,you earn $144 a day,but if you become ill,you will only earn $100 a day.There is a 25% chance you will get the flu without a flu shot.If you do receive the flu shot,then you definitely will not get the flu.What is the actuarially fair price for the flu shot given this information?

Accepted Answer

The actuarially fair price is equal to your expected loss,which is (144 - 100)(0.25)= $11.Answer is (d)

Question 10

Which of the following policies limits the extent of moral hazard in the health insurance market?

Accepted Answer

A stop loss places a lifetime cap on health care expenditures,causing patients to become more price sensitive.Large deductibles place the cost of health care on the patient initially,causing patients to be more sensitive about prices.Varying or increasing co-insurance rates can be used so that patients bear a portion of the cost.

Question 11

It is flu season.When you are healthy,you will earn $144 a day,but if you become ill,you will only earn $100 a day.There is a 25% chance you will get the flu.If your utility function is equal to  where W is equal to wealth,then what is your expected utility of catching the flu?

Accepted Answer

We need to find the expected utility.Therefore,we use the following formula: Prob(well)U(wealth when well)+ Prob(ill)U(wealth when ill)= (.75)(12)+ (.25)(10)= 11.5.

Question 12

Insurance coverage is sold at

Accepted Answer

Insurance is sold at the actuarially fair price plus the loading fee.The actuarially fair price will cover the expected cost of treatment,and the loading fee covers administrative cost for providing the insurance.

Question 13

In the figure below: By how much do expenditures increase with insurance? What is the deadweight loss to society for insurance?

Accepted Answer

The answer of In the figure below: By how much...

Question 14

Lucy Ramirez has $22,500 in income.After a recent trip to Cuba,she discovers that there is a 25% chance of acquiring Cubanitis.The disease is 100% curable but requires the Fidelonomy procedure (at a cost of $12,500).The Kuba-Kuba Insurance Company offers a policy that will cover the Fidelonomy.The premium they charge is $4,000.Of this premium,the pure premium is __________ and the loading fee is _______.

Accepted Answer

The pure premium is the actuarially fair price (or expected cost),which is equal to $12,500*(0.25)= $3,125.The loading fee is the difference between the full premium and the pure premium,$4,000 - $3,125 = $875.

Question 15

When an insurer promises to pay 30% of treatment costs,this amount is known as a

Accepted Answer

This is an example of a co-insurance rate where the insurance company pays 30% of the cost and the patient pays 70% of the cost.

Question 16

Calculate the expected return (or expected winnings)in a game where a person wins $1 with the probability of 1/3 ,$5 with the probability of1/6 ,and $0 with the probability of 1/2 .

Accepted Answer

E(win)= ($1)(1/3)+ ($5)(1/6)+ ($0)(1/2)= 1/3 + 5/6 = $1 1/6.

Question 17

Suppose there are two types of people in an insurance market: high and low risks.The high-risk person is sick 10% of the time and the low-risk person is sick 5% of the time.The probability of any individual being high risk is 40%.Upon getting sick,an individual loses $10,000 in medical expenses.If the insurer cannot distinguish between the two types,but the two individuals know their types,what will be the equilibrium premium?

Accepted Answer

The answer of Suppose there are two types of people...

Question 18

In the figure, the change in insurance coverage causes a social welfare loss equal to:

Accepted Answer

The social welfare loss is the reduction in the sum of producer and consumer surplus caused by the change in insurance coverage. In this case, the reduction in consumer surplus is $100 (from 300 to 200), and the reduction in producer surplus is $60 (from 180 to 120), for a total reduction of $160. However, there is a transfer of $120 from the insurance company to the insured, which partially offsets the reduction in consumer surplus. Therefore, the net social welfare loss is $160 - $120 = $40.

Question 19

Suppose there are two types of people in an insurance market: high and low risks.The high-risk person is sick 10% of the time and the low-risk person is sick 5% of the time.The probability of any individual being high risk is 40%.Upon getting sick,an individual loses $10,000 in medical expenses.What if the individuals do not know their type?

Accepted Answer

The answer of Suppose there are two types of people...

Question 20

Suppose the inverse demand for physician office visits is P = 1000 - 20Q.Now suppose an insurance policy provides a co-insurance rate of 50%.Graph the new demand function with health insurance.

Accepted Answer

The answer of Suppose the inverse demand for physician office...

Quiz 7: The Demand for Health Insurance