Question 1

Lee is a rational consumer with complete health insurance (no copayments or deductibles).He will use medical care up to the point at which his:

Accepted Answer

A rational consumer will continue to consume a good or service until the marginal benefit of consuming an additional unit is zero, as they face no out-of-pocket costs due to complete insurance coverage.

Question 2

Individuals value insurance because they would ideally like to:

Accepted Answer

Insurance is valued because it allows individuals to maintain a consistent level of consumption, even in the face of adverse events like unemployment or illness, by providing financial support during those times.

Question 3

Which of the following is NOT a reason for government intervention in insurance markets?

Accepted Answer

Positive externalities refer to the benefits that individuals and society receive from individuals who purchase insurance, such as fewer uninsured drivers on the road leading to lower likelihood of accidents for everyone. This is a reason for government intervention in insurance markets. Adverse selection, redistribution, and paternalism are all reasons why governments may intervene in insurance markets to improve efficiency, equity, or social welfare.

Question 4

You lower the deductible on your car insurance and start driving like Michael Schumacher (a retired Formula One race car driver).This is an example of:

Accepted Answer

This scenario is an example of moral hazard because the individual is taking more risks and driving more recklessly because they know they have a lower deductible and will not have to pay as much if they get into an accident.

Question 5

Suppose you go from being uninsured to buying a health insurance policy.You respond by jumping out of a perfectly good airplane for the first time-attached to a parachute,of course.This behavior is best characterized as:

Accepted Answer

This behavior is best characterized as moral hazard, which refers to the phenomenon where individuals are more likely to take risks or consume health care services that they would not have taken or consumed had they not had insurance. In this case, the individual feels more protected or secure with the health insurance policy, and therefore engages in a risky behavior.

Question 6

Is self-insurance more likely to be chosen by rich or by poor people? Explain why.

Accepted Answer

The answer of Is self-insurance more likely to be chosen...

Question 7

If government intervenes in the market for health insurance in order to address the adverse selection problem and improve efficiency:

Accepted Answer

Adverse selection in health insurance markets occurs when high-risk individuals are more likely to purchase insurance, or purchase greater amounts, than low-risk individuals, knowing their higher likelihood of needing it. This can lead to higher premiums for everyone, potentially driving low-risk individuals out of the market. Government intervention, such as mandating insurance coverage or providing subsidies, aims to keep low-risk individuals in the market, effectively spreading the risk. This results in a redistribution from low-risk to high-risk individuals, as low-risk individuals end up paying more into the system relative to their expected use of healthcare services, subsidizing the high-risk individuals who are more likely to use those services.

Question 8

Under realistic conditions,optimal social insurance systems should:

Accepted Answer

Optimal social insurance systems should partially, but not completely, insure individuals against adverse events. Completely insuring individuals could created perverse incentives and discourage individuals from taking responsibility for their own actions. On the other hand, not insuring individuals at all would leave those who are most vulnerable to adverse events without any protection. Therefore, partial insurance strikes a balance between providing support for those in need while still incentivizing individuals to make responsible decisions.

Question 9

Administrative costs for private insurance average about _____% of claims paid,while the administrative costs of Medicare average about _____ of claims paid.

Accepted Answer

Administrative costs for private insurance are significantly higher than those for Medicare. On average, private insurance administrative costs are about 15% of claims paid, whereas Medicare's administrative costs are much lower, around 1.5% of claims paid. This reflects the efficiency and lower overhead of the Medicare system compared to private insurance.

Question 10

If the government mandates that everyone have auto insurance because uninsured motorists cost other drivers money through higher premiums,which justification for government intervention is being used?

Accepted Answer

The government is mandating auto insurance because of the negative externality of uninsured motorists causing higher premiums for other drivers.

Question 11

Maria is a rational consumer with no health insurance.She will use medical care up to the point at which her:

Accepted Answer

Rational consumers make decisions at the margin, maximizing their utility by consuming until the point where the marginal benefit equals the marginal cost. Maria, being a rational consumer, will use medical care up to the point at which her marginal benefit is equal to the marginal cost of medical care. Thus, option C is the best choice. Options A and D are incorrect since total benefit or marginal benefit being equal to zero doesn't make any sense. Option B doesn't make sense either since marginal benefit being zero implies that she won't consume any further medical care which isn't rational.

Question 12

A market equilibrium in which all types of individuals buy full insurance even though it is not fairly priced to all individuals is called a _________ equilibrium and occurs when all consumers are ___________.

Accepted Answer

In a pooling equilibrium, all types of individuals buy full insurance even though it is not fairly priced to all individuals. This occurs when all consumers are risk averse and willing to pay a premium to avoid risk. Therefore, the best choice is B, which identifies a pooling equilibrium and risk-averse individuals.

Question 13

Suppose that there are two regions of a state,one where car theft is high and the other where car theft is very low.The state allows insurance companies to charge different premiums (which include insurance against vehicle theft)based in part on where the driver lives.Suppose the government is considering a policy change that would make it illegal to charge higher premiums to people in the areas of higher car theft.
(a)Assume that all drivers in the state are very risk averse when it comes to insurance against theft and that the insurance firms offer one rate to all drivers in that state.What kind of equilibrium will result? Who,if anyone,will pay a risk premium? Who will be better off,and who will be worse off?
(b)What might happen if the drivers in the areas of low car theft were not very risk averse?

Accepted Answer

The answer of Suppose that there are two regions of...

Question 14

If a person has imperfect or partial self-insurance against job loss,they are likely to:

Accepted Answer

If a person has imperfect or partial self-insurance against job loss, they are likely to smooth consumption to some extent, but not fully. This means that they may reduce their consumption, but not to the point of zero, in the event of a job loss. They may also draw on their savings or other sources of income to maintain some level of consumption. However, they may not be able to smooth consumption fully, as the loss of their job may have a significant impact on their overall income and financial situation.

Question 15

Suppose you and your immediate relatives agree to support one another in the event one of you loses your job.This is an example of:

Accepted Answer

This is an example of self-insurance, where the family members are pooling resources to provide support in case of job loss. Disability insurance and workers' compensation are typically provided by employers, while unemployment insurance is a government-run program.

Question 16

The reasons for government involvement in social insurance include all of the following EXCEPT:

Accepted Answer

The reasons for government involvement in social insurance include addressing potential adverse selection problems, achieving cost savings, and paternalistic beliefs that individuals may not engage in necessary planning. The adverse effect on the distribution of income is not a reason for government involvement in social insurance. In fact, government involvement in social insurance is often aimed at reducing income inequality and providing a safety net for those who may not have access to private insurance or have low income.

Question 17

If the government pays part of the health care costs of citizens determined by the government to be unlucky,which of the following justifications for government intervention is being used?

Accepted Answer

The justification for government intervention in this scenario is redistribution, as the government is redistributing resources to assist those it determines to be in need due to their "unlucky" circumstances, aiming to achieve a more equitable outcome.

Question 18

Suppose that you're selling life insurance,and a 40-year-old male nonsmoker asks you for a price on a $1 million policy for the next 10 years.Your coworker suggests that the rate should be based on the death rates of male nonsmokers in their 40s in the general population.What do you say?

Accepted Answer

The answer of Suppose that you're selling life insurance,and a...

Question 19

How do the benefits from disability insurance compare with benefits from unemployment insurance? Compare and contrast each with respect to the factors that influence how much social insurance increases consumption smoothing.

Accepted Answer

The answer of How do the benefits from disability insurance...

Question 20

If government subsidizes the health insurance costs of individuals because individuals do not sufficiently realize the importance of having health insurance,which justification for government intervention is being used?

Accepted Answer

Paternalism is the justification for government intervention when it is assumed that individuals may not know what is best for them, and therefore the government must intervene to promote their well-being. In this scenario, the government is subsidizing health insurance costs for individuals because they may not realize the importance of having health insurance, which is a form of paternalism.

Quiz 12: Social Insurance- the New Function of Government

Lee is a rational consumer with complete health insurance (no copayments or deductibles) .He will use medical care up to the point at which his: