Question 1

Many large companies offer employees time off during the workday to attend seminars on how to improve their health. Some even give bonuses to people who show that they are adopting healthy lifestyles by, for example, weighing in before and after the holidays to show that they are following a sensible diet. Other than showing that they "care" about their employees and trying to minimize the number of days missed from work, why would a company adopt a program like this?

Accepted Answer

The answer of Many large companies offer employees time off...

Question 2

Experience rating systems for pricing insurance are based on past medical bills of a firm's employees.

Accepted Answer

Experience rating systems are based on past medical bills of a firm's employees, and this information is used to determine the rate of insurance premiums for the future.

Question 3

In communities where more people carry property insurance you would expect people to be
A) less careful about securing their possessions.
B) more careful about securing their possessions.
C) less likely to engage in behaviors that would be classified as moral hazard.
D) paying less for property insurance relative to communities where fewer people carry property insurance.

Accepted Answer

When more people carry property insurance, they may become less careful about securing their possessions due to the reduced financial risk, a phenomenon known as moral hazard.

Question 4

In the U.S. health care market, the uninsured typically receive health care for
A) emergencies, but not for preventative care.
B) preventative care, but not for emergencies.
C) both emergencies and preventative care.
D) neither emergencies nor preventative care.

Accepted Answer

Although the uninsured may receive emergency medical care, they typically do not have access to affordable preventative care options. This means that they are more likely to rely on emergency care when their health conditions become severe, rather than being able to receive regular check-ups and treatments to prevent health problems from becoming serious.

Question 5

Moral hazard is more likely to arise when
A) one side of an economic relationship cannot observe the behavior of those on the other side.
B) adverse selection is present.
C) insurance policies have high deductibles.
D) people are uninsured.

Accepted Answer

Moral hazard occurs when one party takes risks because they do not bear the full consequences of their actions. This is more likely to happen when the other party cannot observe the behavior of the first party because it is easier for the first party to hide their risky behavior.

Question 6

People who apply for loans know more about their ability to repay the loan than the lenders do. This is an example of
A) asymmetric information.
B) public information.
C) a negative externality.
D) a community rating.

Accepted Answer

Asymmetric information refers to a situation in which one party in a transaction has more information than the other party. In this case, borrowers have more information about their ability to repay the loan than lenders do, which can lead to adverse selection and moral hazard problems.

Question 7

Suppose that Harold buys collision insurance for his car and then drives it recklessly. This is an example of
A) a positive spillover.
B) moral hazard.
C) adverse selection.
D) irrational behavior.

Accepted Answer

Harold's reckless driving after buying collision insurance is an example of moral hazard. Moral hazard occurs when an individual takes more risks or behaves irresponsibly because they are protected by insurance. In this case, Harold may feel more inclined to drive recklessly because he knows he is covered by insurance if a collision occurs.

Question 8

Relative to people who are eligible for group health insurance, individuals who are not covered by a group health insurance plan tend to pay
A) more for health insurance regardless of their health condition.
B) more for health insurance if they are unhealthy and less for health insurance if they are healthy.
C) less for health insurance regardless of their health condition.
D) less for health insurance if they are unhealthy and more for health insurance if they are healthy.

Accepted Answer

Individuals who are not covered by a group health insurance plan tend to pay more for health insurance regardless of their health condition because group plans offer lower premiums due to the risk being spread out among a larger pool of people. Individuals who seek individual health insurance coverage are viewed as a higher risk and may have to pay more to compensate for the additional risk.

Question 9

The existence of the Federal Deposit Insurance Corporation (FDIC)
A) increases the risk of moral hazard in the savings and loan industry.
B) reduces the risk of moral hazard in the savings and loan industry.
C) increases the risk that customers of savings and loans will engage in moral hazard, but reduces the risk that the lenders will engage in moral hazard.
D) reduces the risk that customers of savings and loans will engage in moral hazard, but increases the risk that the lenders will engage in moral hazard.

Accepted Answer

The FDIC insures deposits, which can lead banks to take on riskier investments because they know deposits are protected, increasing moral hazard for lenders.

Question 10

Assume that an insurance company sets a single price for insurance equal to the total medical bills paid by the insurance company divided by the number of its customers. If it pays medical bills of $5,000 for half of its customers and $9,000 for the other half of its customers, the price of insurance will be
A) $5,000.
B) $6,000.
C) $7,000.
D) $9,000.

Accepted Answer

The total medical bills paid by the insurance company would be:

($5,000 * 0.5) + ($9,000 * 0.5) = $7,000

The number of its customers is not given in the problem, but it does not matter because the price of insurance is simply the total medical bills paid divided by the number of customers. Therefore, the price of insurance would be:

$7,000 / number of customers

Since we do not have the exact number of customers, we cannot calculate the exact price of insurance, but we know that it would be between $5,000 and $9,000. The closest option is C, $7,000.

Question 11

Recall the Application about genetic discrimination to answer the following question(s).
-According to the Application, ________ discrimination occurs when an insurance company treats someone differently due to a gene mutation that increases the risk of an inherited disorder.
A) racial
B) genetic
C) gender
D) religious

Accepted Answer

The Application explicitly mentions genetic discrimination as the discrimination that occurs when an insurance company treats someone differently due to a gene mutation that increases the risk of an inherited disorder.

Question 12

Experience rating systems for pricing insurance discourage firms from spending money to try to improve their employees' health.

Accepted Answer

Experience rating systems for insurance pricing adjust premiums based on the claim history of a firm. If a firm invests in improving their employees' health, it can lead to fewer claims, which in turn can lower their insurance premiums. This creates an incentive for firms to invest in health improvement initiatives.

Question 13

Suppose that lenders believe that the government will provide assistance if too many of the lenders' borrowers do not pay back their loans. If lenders expect government assistance they will
A) make more loans to borrowers who are less likely to repay them.
B) make fewer loans to borrowers who are less likely to repay them.
C) increase the interest rates that they charge borrowers who are less likely to repay loans.
D) not change their lending policies because this expectation is not reasonable.

Accepted Answer

If lenders believe the government will provide assistance, they are more likely to take risks and make loans to borrowers who are less likely to repay them, knowing that they will be bailed out in case of default. Therefore, the best choice is A.

Question 14

Recall the Application about genetic discrimination to answer the following question(s).
-According to the Application, the information provided from genetic testing would ________ insurance prices for high-cost customers, ________ insurance prices for low-cost customers, and therefore ________ the adverse selection problem.
A) increase; increase; increase
B) decrease; decrease; decrease
C) increase; decrease; increase
D) increase; decrease; decrease

Accepted Answer

The genetic testing information would increase insurance prices for high-cost customers (those with higher likelihood of developing certain diseases) and decrease insurance prices for low-cost customers (those with lower likelihood of developing certain diseases). This would therefore decrease the adverse selection problem, as high-risk individuals would be paying more for their insurance, rather than the cost being spread out among all customers.

Question 15

Which of the following is NOT an example of moral hazard?
A) People take poor care of their health because they have health insurance.
B) People drive recklessly because they have medical insurance.
C) People don't lock their doors because they have theft insurance.
D) All of the above are examples of moral hazard.

Accepted Answer

Moral hazard occurs when a person takes more risks because they know they are protected, often by insurance. All the examples provided (A, B, C) illustrate situations where individuals might engage in riskier behavior because they have insurance coverage, which is the essence of moral hazard.

Question 16

Andy does not bother to lock the door to his house because he has theft insurance. This is an example of
A) a positive spillover.
B) moral hazard.
C) adverse selection.
D) irrational behavior.

Accepted Answer

Andy's behavior is an example of moral hazard, which is when an individual takes more risks because they are protected against negative consequences. In this case, Andy is not taking the necessary precautions to protect his home because he knows his theft insurance will cover any losses.

Question 17

You do not worry about how your bank is investing your money because your deposits are federally insured. This is an example of
A) a positive spillover.
B) moral hazard.
C) adverse selection.
D) irrational behavior.

Accepted Answer

This is an example of moral hazard where the insured individual takes potentially imprudent risks because they are protected from the consequences of their actions. In this case, the depositor is not concerned about how the bank invests their money because they believe that the Federal Deposit Insurance Corporation will reimburse them if the bank fails.

Question 18

Experience rating systems for pricing insurance encourage firms to discriminate against older and disabled workers in their hiring practices.

Accepted Answer

Experience rating systems for pricing insurance assess a company's risk based on their claims history. This can lead firms to discriminate against older and disabled workers as they may have a higher likelihood of making claims and resulting in higher insurance premiums for the company. To avoid this, some firms may choose to preferentially hire younger and able-bodied workers, leading to discrimination in hiring practices.

Question 19

Experience ratings provide firms with an incentive NOT to
A) hire older workers.
B) invest in health and safety programs.
C) hire disabled workers.
D) both A and C

Accepted Answer

Experience ratings, which adjust a firm's insurance premiums based on the claims history, can disincentivize hiring older or disabled workers due to perceived higher health or injury risks, potentially leading to higher insurance costs.

Question 20

One way that insurance companies can reduce the moral hazard problem is to
A) make insurance customers pay a deductible before the company pays on a claim.
B) engage in genetic testing to determine who is more likely to be high risk.
C) eliminate copayments on insurance claims.
D) insure only customers with good morals.

Accepted Answer

By making insurance customers pay a deductible before the company pays on a claim, it reduces the likelihood of people making small and frivolous claims, as they would have to pay a portion of the claim themselves. This reduces the moral hazard and encourages people to be more careful and only claim when there is a significant loss. The other options, such as genetic testing or only insuring customers with good morals, can be unethical, discriminatory, and also raise privacy concerns. Eliminating copayments on insurance claims may encourage people to make more claims, leading to an increase in moral hazard.

Quiz 9: Imperfect Information, External Benefits, and External Costs

Experience rating systems for pricing insurance are based on past medical bills of a firm's employees.

In communities where more people carry property insurance you would expect people to be

In the U.S. health care market, the uninsured typically receive health care for

Moral hazard is more likely to arise when

People who apply for loans know more about their ability to repay the loan than the lenders do. This is an example of

Suppose that Harold buys collision insurance for his car and then drives it recklessly. This is an example of

Relative to people who are eligible for group health insurance, individuals who are not covered by a group health insurance plan tend to pay

The existence of the Federal Deposit Insurance Corporation (FDIC)

Recall the Application about genetic discrimination to answer the following question(s) . -According to the Application, ________ discrimination occurs when an insurance company treats someone differently due to a gene mutation that increases the risk of an inherited disorder.

Experience rating systems for pricing insurance discourage firms from spending money to try to improve their employees' health.

Suppose that lenders believe that the government will provide assistance if too many of the lenders' borrowers do not pay back their loans. If lenders expect government assistance they will

Recall the Application about genetic discrimination to answer the following question(s) . -According to the Application, the information provided from genetic testing would insurance prices for high-cost customers, insurance prices for low-cost customers, and therefore the adverse selection problem.

Which of the following is NOT an example of moral hazard?

Andy does not bother to lock the door to his house because he has theft insurance. This is an example of

You do not worry about how your bank is investing your money because your deposits are federally insured. This is an example of

Experience rating systems for pricing insurance encourage firms to discriminate against older and disabled workers in their hiring practices.

Experience ratings provide firms with an incentive NOT to

One way that insurance companies can reduce the moral hazard problem is to