Deck 12: Social Insurance- the New Function of Government

Question 1

Suppose you foresee two possibilities for your health: You will either get a brain tumor or will have nothing more than a bout with the flu.These two possibilities are called:

A) moral hazards.
B) self-insurance.
C) consumption.
D) states of the world.

Answer 1

states of the world.

Question 2

Which of the following provides insurance against injuries and problems that end a worker's career?

A) disability insurance
B) workers' compensation
C) Medicare
D) unemployment insurance

Answer 2

disability insurance

Question 3

Asymmetric information between buyers and sellers results in:

A) adverse selection.
B) rent seeking.
C) moral hazard.
D) X-inefficiency.

Answer 3

adverse selection.

Question 4

If you do not qualify for a federal insurance program because your income or wealth is too high,that program is characterized by:

A) adverse selection.
B) means testing.
C) moral hazard.
D) experience rating.

Question 5

People buying insurance aim to shift consumption from periods when consumption is ___________ to periods when consumption is ___________ and marginal utility is relatively ___________.

A) high; low; low
B) high; low; high
C) low; high; high
D) low; high; low

Question 6

Which of the following provides insurance against job loss?

A) disability insurance
B) workers' compensation
C) Medicare
D) unemployment insurance

Question 7

An actuarially fair premium is set equal to the insurer's:

A) expected payout,assuming no administrative costs or profits.
B) expected administrative costs,assuming maximum profits.
C) desired amount of profit.
D) total costs.

Question 8

A wide variety of private insurance products exist in the United States,including all of the following EXCEPT:

A) auto insurance.
B) life insurance.
C) casualty and property.
D) Medicare.

Question 9

Which program provides insurance to cover medical expenditures for individuals over the age of 65?

A) disability insurance
B) Social Security
C) workers' compensation
D) Medicare

Question 10

Which of the following provides insurance against earnings loss due to retirement?

A) disability insurance
B) Social Security
C) workers' compensation
D) Medicare

Question 11

Consumers aim for ____________ because of ______________.

A) self-insurance; diminishing marginal utility
B) consumption smoothing; diminishing marginal utility
C) self-insurance; means-tested program benefits
D) consumption smoothing; means-tested program benefits

Question 12

Insurance allows individuals to:

A) consume more in every period in the future.
B) have steadier consumption in every period in the future.
C) shift consumption from bad possible outcomes to good possible outcomes.
D) avoid negative outcomes,such as automobile accidents.

Question 13

Suppose that among a group of uninsured people,the only ones who want to buy health insurance are the ones who happen to enjoy jumping out of perfectly good airplanes.This is an example of:

A) adverse selection.
B) rent seeking.
C) moral hazard.
D) X-inefficiency.

Question 14

Which of the following is NOT true about the change in government spending over the past 50 years?

A) The share of defense spending has decreased significantly.
B) Spending on health and social security spending has increased dramatically.
C) After adjusting for inflation,government spending has remained constant.
D) The share of health care spending increased more than the spending in social security and income security.

Question 15

Which term refers to charging a price for insurance that is a function of realized outcomes?

A) actuarial adjustment
B) moral hazard rating
C) experience rating
D) risk adjustment

Question 16

By 2011,about _____ cents of each dollar of federal spending was used for national defense and about _____ cents of each dollar was paid for Social Security.

A) 5; 20
B) 15; 25
C) 20; 20
D) 10; 50

Question 17

Paula earns $40,000 per year and rides her bicycle to work.There is a 1% chance that she will break her leg in the next year and a 99% chance that she won't be hurt at all.Medical bills for a broken leg are estimated at $4,000.If Paula buys full health insurance at an actuarially fair premium,what is the premium she will pay for the next year?

A) $4
B) $40
C) $400
D) $4,000

Question 18

Suppose you go to buy a life insurance policy and the underwriter asks you to allow the company access to all of your medical records.What is the underwriter concerned about?

A) adverse selection
B) rent seeking
C) moral hazard
D) X-inefficiency

Question 19

Which of the following best describes risk aversion?

A) insurance premiums set equal to the insurer's expected payout
B) adverse actions taken by individuals or producers in response to insurance against adverse outcomes
C) the fact that insured individuals know more about their risk level than does the insurer
D) the extent to which individuals are more impacted by a negative change in income than by a positive change in income of the same magnitude

Question 20

Which of the following provides insurance against on-the-job accidents?

A) disability insurance
B) workers' compensation
C) Medicare
D) unemployment insurance

Question 21

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:

A) total benefit is equal to the cost of care paid by the insurance provider.
B) marginal benefit is zero.
C) marginal benefit is equal to the marginal cost of care paid by the insurance provider.
D) total benefit is equal to zero.

Question 22

Individuals value insurance because they would ideally like to:

A) have more consumption when an adverse event like unemployment or illness befalls them.
B) have less consumption when an adverse event like unemployment or illness befalls them.
C) have the same consumption regardless of whether an adverse event like unemployment or illness befalls them.
D) not have an adverse event like unemployment or illness befall them.

Question 23

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

A) adverse selection
B) positive externalities
C) redistribution
D) paternalism

Question 24

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:

A) adverse selection.
B) rent seeking.
C) moral hazard.
D) X-inefficiency.

Question 25

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:

A) adverse selection.
B) means testing.
C) moral hazard.
D) X-inefficiency.

Question 26

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

Question 27

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

A) there will likely be some redistribution from high-risk individuals to low-risk individuals.
B) there will likely be some redistribution from low-risk individuals to high-risk individuals.
C) everyone will be better off as a result.
D) everyone will be worse off as a result.

Question 28

Under realistic conditions,optimal social insurance systems should:

A) not insure individuals against adverse events.
B) partially,but not completely,insure individuals against adverse events.
C) completely insure individuals against adverse events.
D) prevent adverse events.

Question 29

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

A) 10%; 10%
B) 2%; 20%
C) 15%; 1.5%
D)1)%5; 15%

Question 30

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?

A) redistribution
B) paternalism
C) externalities
D) adverse selection

Question 31

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

A) total benefit is equal to the cost of medical care.
B) marginal benefit is zero.
C) marginal benefit is equal to the marginal cost of medical care.
D) total benefit is equal to zero.

Question 32

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 ___________.

A) pooling; not averse to risk
B) pooling; risk averse
C) separating; not averse to risk
D) separating; risk averse

Question 33

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?

Question 34

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

A) allow consumption to fall to zero in the event of a job loss.
B) maintain constant consumption in the event of a job loss.
C) smooth consumption fully.
D) smooth consumption to some extent,but not fully

Question 35

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:

A) disability insurance.
B) workers' compensation.
C) self-insurance.
D) unemployment insurance.

Question 36

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

A) a potential adverse selection problem stemming from asymmetric information.
B) a potential savings in decision-making and administrative costs.
C) the paternalistic belief that some individuals will not engage in necessary planning.
D) the adverse effect such involvement has on the distribution of income.

Question 37

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?

A) high administrative costs
B) redistribution
C) paternalism
D) externalities

Question 38

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?

Question 39

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.

Question 40

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?

A) high administrative costs
B) redistribution
C) paternalism
D) adverse selection

Question 41

Is moral hazard likely to be a bigger problem in the health insurance market or the life insurance market? Explain.

Question 42

Optimal social insurance systems should partially but not completely insure individuals against adverse events.Explain.