Question 1

If a fire insurance company requires firms buying fire insurance to install automatic sprinkler systems, the insurance company is trying to reduce

Accepted Answer

The insurance company is trying to reduce the moral hazard problem, as installing automatic sprinkler systems reduces the risk of fire damage and the incentive for the firm to take careless or risky actions that would increase the likelihood of a fire.

Question 2

Figure 7-1  Figure 7-1 represents the market for vaccinations. Vaccinations are considered a benefit to society, and the figure shows both the marginal private benefit and the marginal social benefit from vaccinations.
-Refer to Figure 7-1. The market equilibrium price is

Accepted Answer

The answer of Figure 7-1  Figure 7-1 represents the...

Question 3

Figure 7-1  Figure 7-1 represents the market for vaccinations. Vaccinations are considered a benefit to society, and the figure shows both the marginal private benefit and the marginal social benefit from vaccinations.
-Refer to Figure 7-1. The efficient equilibrium quantity is ________ thousand vaccinations.

Accepted Answer

The efficient equilibrium quantity occurs where the marginal social benefit (MSB) equals the marginal cost (MC), which is at a quantity of 300 thousand vaccinations. This is because at this quantity, the MSB curve intersects the demand curve (which represents the marginal private benefit) at the same point where the MC curve intersects the supply curve. At this quantity, the benefit to society (MSB) is maximized while the cost to produce the vaccinations (MC) is minimized, leading to an efficient outcome. Any quantity below or above this point would result in a deadweight loss, as the benefit to society and/or the cost to produce the vaccinations would not be optimized.

Question 4

Figure 7-1  Figure 7-1 represents the market for vaccinations. Vaccinations are considered a benefit to society, and the figure shows both the marginal private benefit and the marginal social benefit from vaccinations.
-Refer to Figure 7-1. At the market equilibrium,

Accepted Answer

The answer of Figure 7-1  Figure 7-1 represents the...

Question 5

Figure 7-1  Figure 7-1 represents the market for vaccinations. Vaccinations are considered a benefit to society, and the figure shows both the marginal private benefit and the marginal social benefit from vaccinations.
-Refer to Figure 7-1. At the efficient equilibrium,

Accepted Answer

At the efficient equilibrium, both the marginal private benefit (MPB) and marginal social benefit (MSB) are equal to the marginal cost (MC) of providing vaccinations. This means that the maximum economic surplus is attained, which is the difference between the total benefit and total cost of vaccinations. Therefore, choice A is correct. Choices B, C, and D are incorrect as they do not reflect the efficient allocation of resources in the market.

Question 6

Automobile insurance companies have a problem with people who buy insurance and then drive recklessly or take less care to avoid losses after being insured. In other words, the automobile insurance market is subject to

Accepted Answer

Moral hazard refers to the situation where the insured party takes more risks or is less careful because they are protected by insurance. This is a problem for insurance companies because it increases the likelihood of claims and losses. Asymmetric information refers to a situation where one party has more information than the other, which can lead to adverse selection. Market signaling refers to the process of conveying information about a product or service to consumers, which is not relevant to this scenario. Adverse selection occurs when one party has more information than the other and uses that information to their advantage in a transaction, but this is not the primary issue with reckless driving in the automobile insurance market.

Question 7

Figure 7-1  Figure 7-1 represents the market for vaccinations. Vaccinations are considered a benefit to society, and the figure shows both the marginal private benefit and the marginal social benefit from vaccinations.
-Refer to Figure 7-1. The efficient equilibrium price is

Accepted Answer

The efficient equilibrium price is where the marginal social benefit equals the marginal cost, which is at a price of $25. This is the point where society receives the maximum benefit from vaccinations without any market inefficiencies. Any price below this, such as $20, would result in a higher quantity of vaccinations demanded but also some deadweight loss because the marginal social benefit exceeds the marginal cost. Therefore, the best choice is B, a price of $25, to achieve market efficiency.

Question 8

Figure 7-1  Figure 7-1 represents the market for vaccinations. Vaccinations are considered a benefit to society, and the figure shows both the marginal private benefit and the marginal social benefit from vaccinations.
-Because of the positive externality of vaccinations, economic efficiency would be improved

Accepted Answer

The marginal social benefit curve lies above the marginal private benefit curve, indicating that the positive externality of vaccinations exists. If more people were vaccinated, the overall benefit to society (marginal social benefit) would increase, leading to improved economic efficiency. Therefore, the best choice is B (if more people were vaccinated).

Question 9

What is the principal-agent problem?

Accepted Answer

The principal-agent problem is a situation where there is a conflict of interest between a principal (who hires an agent to act on their behalf) and the agent (who is supposed to work in the best interest of the principal). The agent may have incentives to act in their own self-interest rather than in the principal’s interest. This can create a moral hazard, such as engaging in hidden actions, shirking responsibilities or taking excessive risk. The principal-agent problem can occur in different contexts such as business, politics, and law.

Question 10

In the principal-agent relationship, the agent is

Accepted Answer

The principal-agent relationship involves the principal (resource owner) delegating authority to the agent (person in control of resources not his own) to act on his behalf. The agent has a contractual obligation to use these resources in the interests of the principal. Thus, option B fits the definition of the agent in this relationship. Option A is incorrect as the resource owner cannot be the agent. Option C is incorrect as compensation is not a necessary condition for the principal-agent relationship. Option D is incorrect as it does not capture the contractual obligations that define the principal-agent relationship.

Question 11

Suppose a large firm allows its employees to choose whether to participate in its health insurance plan. The firm is trying to decide between two plans: Plan I has a low monthly premium but a high deductible, and Plan II has a high monthly premium but a low deductible. Under which plan is adverse selection likely to be a bigger problem?

Accepted Answer

Plan II is likely to draw participants who expect high medical costs as they would prefer low deductibles, which may result in adverse selection as healthy individuals who do not expect to consume much health care services will not be willing to pay the high premiums. This can result in insurance companies paying out more claims than the premiums they collect.

Question 12

Figure 7-1  Figure 7-1 represents the market for vaccinations. Vaccinations are considered a benefit to society, and the figure shows both the marginal private benefit and the marginal social benefit from vaccinations.
-Vaccinating people against a communicable disease such as influenza not only reduces the chances that the person vaccinated will catch the disease but also reduces the probability that an epidemic of the disease will occur. Which of the following statements is true?

Accepted Answer

Vaccinating people against influenza provides both private benefits (reducing the chances of catching the disease) and social benefits (reducing the probability of an epidemic). However, the reduction in the chances of catching the disease is a private benefit, as it only affects the individual who receives the vaccine. On the other hand, the reduction in the probability of an epidemic is a social benefit, as it benefits society as a whole. Therefore, reducing the chances of catching the disease is a private benefit, while reducing the probability of an epidemic is a social benefit.

Question 13

In markets with asymmetric information,

Accepted Answer

Asymmetric information causes adverse selection, as one party has more information than the other and uses it to their advantage. This can then lead to moral hazard, as the party with less information takes more risks due to the lack of knowledge. Therefore, D is the correct choice as it identifies the correct order of events.

Question 14

Figure 7-1  Figure 7-1 represents the market for vaccinations. Vaccinations are considered a benefit to society, and the figure shows both the marginal private benefit and the marginal social benefit from vaccinations.
-Refer to Figure 7-1. The market equilibrium quantity is ________ thousand vaccinations.

Accepted Answer

The answer of Figure 7-1  Figure 7-1 represents the...

Question 15

Figure 7-1  Figure 7-1 represents the market for vaccinations. Vaccinations are considered a benefit to society, and the figure shows both the marginal private benefit and the marginal social benefit from vaccinations.
-In the United States, the bulk of health care spending is paid by health insurance companies. Such a system is also called a third-party payer system where consumers of health care pay a nominal fee and the rest are paid by the health insurance provider. Why might such a system lead to an inefficient outcome?

Accepted Answer

In a third-party payer system, consumers have an incentive to over-consume health care services because the cost of the services is largely covered by the insurance provider, leading to an inefficient allocation of resources. The other options may also have some validity, but they do not directly address the inefficiency arising from the third-party payer system.

Question 16

Figure 7-1  Figure 7-1 represents the market for vaccinations. Vaccinations are considered a benefit to society, and the figure shows both the marginal private benefit and the marginal social benefit from vaccinations.
-Refer to Figure 7-1. Marginal private benefit is represented by which curve?

Accepted Answer

Marginal private benefit is represented by D1, as it reflects the additional benefit to the individual patient from receiving each additional vaccination. D2 represents the total demand for vaccinations, which includes the positive externality (or spillover benefit) of reducing the spread of disease and protecting others in the community. Supply represents the cost to produce vaccinations.

Question 17

Figure 7-1  Figure 7-1 represents the market for vaccinations. Vaccinations are considered a benefit to society, and the figure shows both the marginal private benefit and the marginal social benefit from vaccinations.
-Refer to Figure 7-1. Marginal social benefit is represented by which curve?

Accepted Answer

Marginal social benefit is represented by the D2 curve because it reflects the total benefit to both the individual and society as a whole. D1 only represents the benefit to individuals, and the supply curve represents the cost to producers, not the benefit to society. Therefore, only D2 represents the true marginal social benefit of vaccinations.

Question 18

If a doctor knows that an insurance company will pay for most of a patient's bill, the doctor has more of an incentive to require additional medical procedures and tests, even if the patient may not require them. This is an example of

Accepted Answer

The answer of If a doctor knows that an insurance...

Question 19

Figure 7-1  Figure 7-1 represents the market for vaccinations. Vaccinations are considered a benefit to society, and the figure shows both the marginal private benefit and the marginal social benefit from vaccinations.
-Refer to Figure 7-1. At the market equilibrium, the deadweight loss is equal to

Accepted Answer

The deadweight loss is the area between the supply curve and the demand curve that is not being traded at the market equilibrium. In this case, the deadweight loss is the area between the quantity traded at the equilibrium and the quantity where the marginal social benefit equals the marginal cost. This area is equal to $500,000 in Figure 7-1. Therefore, the correct answer is choice C.

Question 20

Health insurance companies impose deductibles on policies and co-payments on claims

Accepted Answer

Health insurance companies impose deductibles and co-payments to reduce moral hazard problems. Moral hazard refers to the tendency of people to take more risks or use more health care services when they are insured, since they do not bear the full cost of those services. By requiring policyholders to pay some of the cost of their care, deductibles and co-payments encourage them to use health care services more judiciously, thus reducing unnecessary costs and helping to keep insurance premiums affordable.

Quiz 7: The Economics of Health Care

If a fire insurance company requires firms buying fire insurance to install automatic sprinkler systems, the insurance company is trying to reduce

Figure 7-1 Figure 7-1 represents the market for vaccinations. Vaccinations are considered a benefit to society, and the figure shows both the marginal private benefit and the marginal social benefit from vaccinations. -Refer to Figure 7-1. The market equilibrium price is

Figure 7-1 Figure 7-1 represents the market for vaccinations. Vaccinations are considered a benefit to society, and the figure shows both the marginal private benefit and the marginal social benefit from vaccinations. -Refer to Figure 7-1. At the market equilibrium,

Figure 7-1 Figure 7-1 represents the market for vaccinations. Vaccinations are considered a benefit to society, and the figure shows both the marginal private benefit and the marginal social benefit from vaccinations. -Refer to Figure 7-1. At the efficient equilibrium,

Automobile insurance companies have a problem with people who buy insurance and then drive recklessly or take less care to avoid losses after being insured. In other words, the automobile insurance market is subject to

Figure 7-1 Figure 7-1 represents the market for vaccinations. Vaccinations are considered a benefit to society, and the figure shows both the marginal private benefit and the marginal social benefit from vaccinations. -Refer to Figure 7-1. The efficient equilibrium price is

What is the principal-agent problem?

In the principal-agent relationship, the agent is

In markets with asymmetric information,

Figure 7-1 Figure 7-1 represents the market for vaccinations. Vaccinations are considered a benefit to society, and the figure shows both the marginal private benefit and the marginal social benefit from vaccinations. -Refer to Figure 7-1. Marginal private benefit is represented by which curve?

Figure 7-1 Figure 7-1 represents the market for vaccinations. Vaccinations are considered a benefit to society, and the figure shows both the marginal private benefit and the marginal social benefit from vaccinations. -Refer to Figure 7-1. Marginal social benefit is represented by which curve?

If a doctor knows that an insurance company will pay for most of a patient's bill, the doctor has more of an incentive to require additional medical procedures and tests, even if the patient may not require them. This is an example of

Figure 7-1 Figure 7-1 represents the market for vaccinations. Vaccinations are considered a benefit to society, and the figure shows both the marginal private benefit and the marginal social benefit from vaccinations. -Refer to Figure 7-1. At the market equilibrium, the deadweight loss is equal to

Health insurance companies impose deductibles on policies and co-payments on claims