Question 1

Why is the study of asymmetric information associated with the market for "lemons"?

Accepted Answer

A)  Sellers of citrus fruit-lemons, oranges, grapefruit-know the difference between bad fruit and good fruit; buyers do not have this information. 
B)  Because there is little advertising in the market for lemons, buyers have difficulty determining the quality of lemons before they are purchased. 
C)  Potential buyers of used cars have difficulty separating good used cars from bad used cars; bad used cars are often referred to as "lemons." 
D)  Most sellers of used cars have less information about their cars than the dealers who buy them; used cars are often referred to as "lemons." 
A)  Sellers of citrus fruit-lemons, oranges, grapefruit-know the difference between bad fruit and good fruit; buyers do not have this information. 
B)  Because there is little advertising in the market for lemons, buyers have difficulty determining the quality of lemons before they are purchased. 
C)  Potential buyers of used cars have difficulty separating good used cars from bad used cars; bad used cars are often referred to as "lemons." 
D)  Most sellers of used cars have less information about their cars than the dealers who buy them; used cars are often referred to as "lemons." C

Question 2

Consumers usually pay less than the total cost of medical treatment because

Accepted Answer

A)  a third party, usually an insurance company, often pays most of the bill. 
B)  the federal government pays for most medical procedures. 
C)  competition forces doctors and hospitals to charge prices that do not cover their costs. 
D)  a third party, usually an employer, often pays most of the bill. 
A)  a third party, usually an insurance company, often pays most of the bill. 
B)  the federal government pays for most medical procedures. 
C)  competition forces doctors and hospitals to charge prices that do not cover their costs. 
D)  a third party, usually an employer, often pays most of the bill. A

Question 3

Adverse selection occurs in the market for used cars because used car buyers

Accepted Answer

A)  have more information than used car sellers. 
B)  have less information than used car sellers. 
C)  have less incentive to maintain the value of their cars than new car buyers. 
D)  tend to have more accidents than new car buyers. 
A)  have more information than used car sellers. 
B)  have less information than used car sellers. 
C)  have less incentive to maintain the value of their cars than new car buyers. 
D)  tend to have more accidents than new car buyers. B

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. The efficient equilibrium quantity is ________ thousand vaccinations.

Accepted Answer

A)  100 
B)  200 
C)  300 
D)  >300 
A)  100 
B)  200 
C)  300 
D)  >300

Question 5

The principal-agent problem is a problem

Accepted Answer

A)  caused by a person (principal) who hires an agent to act on his behalf but is unwilling to delegate authority to the agent to carry out the task in the best possible way. 
B)  caused by agents pursuing their own interests rather than the interests of the principals who hired them. 
C)  of the power system of boss and subordinate where the boss (principal) exerts influence over his subordinates (agents) using punishment or threat. 
D)  that exists when a person (principal) has more information about the task than the agent he hires to perform the task. 
A)  caused by a person (principal) who hires an agent to act on his behalf but is unwilling to delegate authority to the agent to carry out the task in the best possible way. 
B)  caused by agents pursuing their own interests rather than the interests of the principals who hired them. 
C)  of the power system of boss and subordinate where the boss (principal) exerts influence over his subordinates (agents) using punishment or threat. 
D)  that exists when a person (principal) has more information about the task than the agent he hires to perform the task.

Question 6

Based on the current rate of growth, health care spending as a percentage of GDP through Medicare, Medicaid, and other U.S. government programs is expected to

Accepted Answer

A)  stabilize within the next 20 years. 
B)  account for a majority of spending as a percentage of GDP within 5 years. 
C)  slow down during this decade. 
D)  more than double over the next 40 years. 
A)  stabilize within the next 20 years. 
B)  account for a majority of spending as a percentage of GDP within 5 years. 
C)  slow down during this decade. 
D)  more than double over the next 40 years.

Question 7

In the United States, out-of-pocket spending on health care per person

Accepted Answer

A)  has been rising since 1965. 
B)  has been falling since 1965. 
C)  has remained fairly steady since 1965. 
D)  fell from 1965 through 1995, then began to rise from 1995 to the present. 
A)  has been rising since 1965. 
B)  has been falling since 1965. 
C)  has remained fairly steady since 1965. 
D)  fell from 1965 through 1995, then began to rise from 1995 to the present.

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.
-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

A)  Reducing the chances that the person vaccinated will catch the disease is a private cost while reducing the probability of an influenza epidemic is a social benefit. 
B)  Vaccinating people against communicable diseases yields private benefits in excess of social benefits. 
C)  Reducing the chances that the person vaccinated will catch the disease is a private benefit while reducing the probability of an influenza epidemic is a social benefit. 
D)  The benefits of the influenza vaccination outweigh the costs. 
A)  Reducing the chances that the person vaccinated will catch the disease is a private cost while reducing the probability of an influenza epidemic is a social benefit. 
B)  Vaccinating people against communicable diseases yields private benefits in excess of social benefits. 
C)  Reducing the chances that the person vaccinated will catch the disease is a private benefit while reducing the probability of an influenza epidemic is a social benefit. 
D)  The benefits of the influenza vaccination outweigh the costs.

Question 9

________ occurs when one party takes advantage of having more information than another party about the attributes of the good or service they will exchange.

Accepted Answer

A)  A negative externality 
B)  Moral hazard 
C)  A transaction cost 
D)  Adverse selection 
A)  A negative externality 
B)  Moral hazard 
C)  A transaction cost 
D)  Adverse selection

Question 10

Of the following high-income countries, which has the highest female life expectancy at age 65?

Accepted Answer

A)  Canada 
B)  Japan 
C)  the United Kingdom 
D)  the United States 
A)  Canada 
B)  Japan 
C)  the United Kingdom 
D)  the United States

Question 11

How do adverse selection and moral hazard affect the market for insurance?

Accepted Answer

Both adverse selection and moral hazard

Question 12

One reason why adverse selection problems arise in health insurance markets is that

Accepted Answer

A)  sick people are more likely to want health insurance than healthy people. 
B)  because of advances in medical technology, people are living longer. These medical advances are costly and drive up the price of insurance for everyone. 
C)  the average age of citizens of the United States has increased in recent years, and will continue to increase over the next 20 to 30 years. As older citizens retire, more and more of their medical bills will have to be paid by younger workers. 
D)  fewer men and women are choosing medical careers because of the increase in the cost of malpractice insurance. 
A)  sick people are more likely to want health insurance than healthy people. 
B)  because of advances in medical technology, people are living longer. These medical advances are costly and drive up the price of insurance for everyone. 
C)  the average age of citizens of the United States has increased in recent years, and will continue to increase over the next 20 to 30 years. As older citizens retire, more and more of their medical bills will have to be paid by younger workers. 
D)  fewer men and women are choosing medical careers because of the increase in the cost of malpractice insurance.

Question 13

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

A)  D1 
B)  D2 
C)  Supply 
D)  All of the above represent marginal private benefit. 
A)  D1 
B)  D2 
C)  Supply 
D)  All of the above represent marginal private benefit.

Question 14

Between 1981 and 2011, deaths from cancer have increased in the United States.

Accepted Answer

A) True 
 B)False

Question 15

In what ways do economists and policymakers who believe that market-based reforms are the key to improving the health care system criticize the Patient Protection and Affordable Care Act (ACA)?

Accepted Answer

These people believe that the market for

Question 16

Figure 7-5   Figure 7-5 represents the market for medical services with and without insurance, and the effect of a third-party payer system on the demand for medical services.
-Refer to Figure 7-5. With insurance and a third-party payer system, what is the amount of the deadweight loss?

Accepted Answer

A)  $0 
B)  $2,500 
C)  $5,000 
D)  $24,000 
A)  $0 
B)  $2,500 
C)  $5,000 
D)  $24,000

Question 17

All of the following are part of the "taxes" provision of the Patient Protection and Affordable Care Act (ACA) except

Accepted Answer

A)  pharmaceutical firms and health insurance firms will pay new taxes. 
B)  investors earning more than $200,000 will pay a new tax on their investment income. 
C)  beginning in 2018, all taxes on employer-provided health insurance plans will be reduced or eliminated. 
D)  workers earning more than $200,000 will have their share of the Medicare payroll tax increase. 
A)  pharmaceutical firms and health insurance firms will pay new taxes. 
B)  investors earning more than $200,000 will pay a new tax on their investment income. 
C)  beginning in 2018, all taxes on employer-provided health insurance plans will be reduced or eliminated. 
D)  workers earning more than $200,000 will have their share of the Medicare payroll tax increase.

Question 18

Figure 7-5   Figure 7-5 represents the market for medical services with and without insurance, and the effect of a third-party payer system on the demand for medical services.
-Refer to Figure 7-5. With insurance and a third-party payer system, the equilibrium quantity of medical services is

Accepted Answer

A)  400. 
B)  800. 
C)  1,200. 
D)  >1,200. 
A)  400. 
B)  800. 
C)  1,200. 
D)  >1,200.

Question 19

"Cost disease" refers to the tendency for low productivity in the service sector to lead to higher costs in those industries.

Accepted Answer

A) True 
 B)False

Question 20

Due to adverse selection, very few lemons will be sold in the market for used cars.

Accepted Answer

A) True 
 B)False

Exam 7: The Economics of Health Care

Why is the study of asymmetric information associated with the market for "lemons"?

Consumers usually pay less than the total cost of medical treatment because

Adverse selection occurs in the market for used cars because used car buyers

The principal-agent problem is a problem

Based on the current rate of growth, health care spending as a percentage of GDP through Medicare, Medicaid, and other U.S. government programs is expected to

In the United States, out-of-pocket spending on health care per person

________ occurs when one party takes advantage of having more information than another party about the attributes of the good or service they will exchange.

Of the following high-income countries, which has the highest female life expectancy at age 65?

How do adverse selection and moral hazard affect the market for insurance?

One reason why adverse selection problems arise in health insurance markets is that

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?

Between 1981 and 2011, deaths from cancer have increased in the United States.

In what ways do economists and policymakers who believe that market-based reforms are the key to improving the health care system criticize the Patient Protection and Affordable Care Act (ACA)?

Figure 7-5 Figure 7-5 represents the market for medical services with and without insurance, and the effect of a third-party payer system on the demand for medical services. -Refer to Figure 7-5. With insurance and a third-party payer system, what is the amount of the deadweight loss?

All of the following are part of the "taxes" provision of the Patient Protection and Affordable Care Act (ACA) except

Figure 7-5 Figure 7-5 represents the market for medical services with and without insurance, and the effect of a third-party payer system on the demand for medical services. -Refer to Figure 7-5. With insurance and a third-party payer system, the equilibrium quantity of medical services is

"Cost disease" refers to the tendency for low productivity in the service sector to lead to higher costs in those industries.

Due to adverse selection, very few lemons will be sold in the market for used cars.

Economics: Foundations and Models

Trade-Offs, Comparative Advantage, and the Market System

Where Prices Come From: the Interaction of Demand and Supply

Economic Efficiency, Government Price Setting, and Taxes

Externalities, Environmental Policy, and Public Goods

Elasticity: the Responsiveness of Demand and Supply

Firms, the Stock Market, and Corporate Governance

Comparative Advantage and the Gains From International Trade

Consumer Choice and Behavioral Economics

Technology, Production, and Costs

Firms in Perfectly Competitive Markets

Monopolistic Competition: the Competitive Model in a More Realistic Setting

Oligopoly: Firms in Less Competitive Markets

Monopoly and Antitrust Policy

Pricing Strategy

The Markets for Labor and Other Factors of Production

Public Choice, Taxes, and the Distribution of Income

GDP: Measuring Total Production and Income

Unemployment and Inflation

Economic Growth, the Financial System, and Business Cycles

Long-Run Economic Growth: Sources and Policies

Aggregate Expenditure and Output in the Short Run

Aggregate Demand and Aggregate Supply Analysis

Money, Banks, and the Federal Reserve System

Monetary Policy

Fiscal Policy

Inflation, Unemployment, and Federal Reserve Policy

Macroeconomics in an Open Economy

The International Financial System

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