Question 1

Why has there been a shift away from the traditional fee-for-service structure in the U.S. health care?

Accepted Answer

A)   to address the adverse selection problem associated with the medical profession
B)   prevents insurance companies from raising medical professional insurance premiums
C)   reduces moral hazard by limiting the quality of care provided.
D)   reduces incentives and moral hazards of added services to increase income D

Question 2

State insurance regulators have sometimes reacted by passing rules that attempt to set low premiums for insurance. But over time, ___________________________ must hold: the average amount received by individuals must equal the average amount paid in premiums.

Accepted Answer

A)   the fundamental law of caveat emptor
B)   the fundamental law of insurance
C)   the fundamental principle of profitability
D)   the fundamental principle of actuarial fairness B

Question 3

Ryan lives in Iowa and is completing his fourth year of electrician apprenticeship training. After achieving journeyman status, what will Ryan require from his state government in order to practice his trade?

Accepted Answer

A)   group health insurance
B)   occupational insurance
C)   service contract
D)   occupational license D

Question 4

_____________________ can lead to a situation where, even if sellers are faced with a situation of _______________, they will decide not to cut prices for awhile because they know that buyers in this situation will not react by purchasing a _______________ .

Accepted Answer

A)   Imperfect information; excess supply; higher quantity
B)   Adverse selection; reduced supply; lower quantity
C)   Adverse selection; excess supply; better quality
D)   Imperfect information; reduced supply; higher quality

Question 5

The problem of ________________ in insurance markets is that insurance companies are unable to ______________ .

Accepted Answer

A)   adverse selection; differentiate those with low and high risks
B)   reducing moral hazards; sell insurance in unregulated markets
C)   adverse selection; find mechanisms to reduce moral hazards
D)   adverse selection; sell insurance in unregulated markets

Question 6

An insurance company is likely to believe that having a major accident is a signal of being a _____________, and thus try to _________________.

Accepted Answer

A)   moral hazard; deny this driver further coverage
B)   high-risk driver; raise this driver's insurance premiums
C)   high-risk driver; compel the driver to take defensive driving courses
D)   medium-risk driver; reduce the amount of this driver's coverage

Question 7

Martha has decided to purchase a new home constructed by Crown Builders. In addition to Crown Builder's good reputation in the industry, which of the following likely influenced Martha's decision to purchase a new home?

Accepted Answer

A)   builder's no-charge service contract covering first year
B)   lower insurance premiums because of safety inspections
C)   money-back guarantee for the solar hot water system
D)   low-cost extended warranty on the air conditioner

Question 8

The presence of _____________________ in transactions involving goods can easily cause a ______________________ if the result is only a relatively small number of buyer and sellers communicating enough information so that they can agree on a price.

Accepted Answer

A)   imperfect information; thin market
B)   adverse information; decline in prices or quantities of products sold
C)   adverse selection; decline in prices or quality of purchased goods
D)   imperfect selection; thick market

Question 9

If a website facilitates the sale of goods by individuals and businesses over the internet, but requires actual photos of every item for sale to be posted instead of a manufacturer's stock picture of the product, both the demand and supply of products in good condition will shift due to the improved information, causing quantity to _________ and price to _______________.

Accepted Answer

A)   decrease, be indeterminate
B)   increase, be indeterminate
C)   increase, increase
D)   decrease, increase

Question 10

When people have insurance against a certain event, the notion that those people are less likely to guard against that event occurring is called a _____________________ .

Accepted Answer

A)   risk
B)   hazard risk
C)   moral hazard
D)   moral risk

Question 11

Regardless of how many services are provided, a health maintenance organization provides health care and is paid ___________________ per person enrolled in the plan.

Accepted Answer

A)   within a range of variable amounts
B)   a variable amount
C)   a fixed amount
D)   on a sliding scale

Question 12

When buyers use ___________________ to draw inferences about the quality of products, then markets may have trouble reaching _________________ and quantity.

Accepted Answer

A)   adverse selection; an equilibrium price
B)   imperfect information; a market price
C)   the market price; an equilibrium price
D)   imperfect selection; a market price

Question 13

_________________ in the insurance industry prevents premiums from being much higher than the___________ level in the long term.

Accepted Answer

A)   Competition; actuarially fair
B)   Greater government involvement; free-market profit
C)   Classifying groups by risk; legal requirement
D)   Government intervention; profit

Question 14

A ________________ exists when the buyer pays an extra amount and the seller agrees to fix anything that goes wrong for a set time period.

Accepted Answer

A)   warranty
B)   money-backed guarantee
C)   service contract
D)   money-back warranty

Question 15

How do insurance companies reduce the risk of moral hazard?

Accepted Answer

A)   deny claims with high damages
B)   only allow claims with low damages
C)   investigation and monitoring
D)   classifying people based on credit history

Question 16

Banks are required by law to pay a small fraction of their deposits to the _______________, which goes into a __________ fund that is used to repay depositors their money if the bank should go bankrupt.

Accepted Answer

A)   Federal Reserve Deposit Insurance Fund; deposit insurance
B)   U.S. Deposit Insurance Fund; pooled
C)   Federal Deposit Insurance Corporation; deposit insurance
D)   Federal Bank Deposit Insurance Fund; pooled

Question 17

Briefly explain the purpose of a lender requiring a pledge of collateral from a borrower in exchange for a loan.

Accepted Answer

The answer of Briefly explain the purpose of a lender...

Question 18

If a website facilitates the sale of goods by individuals and businesses over the internet, but requires actual photos of every item for sale to be posted instead of a manufacturer's stock picture of the product, the supply of products in good condition will likely __________ due to the improved information, causing price to __________ .

Accepted Answer

A)   increase, increase
B)   decrease, increase
C)   increase, decrease
D)   decrease, decrease

Question 19

If a website facilitates the sale of goods by individuals and businesses over the internet, but requires actual photos of every item for sale to be posted instead of a manufacturer's stock picture of the product, both the demand and supply of products in good condition will shift due to the improved information. If supply shifts by more than demand, quantity will _____________ and price will _____________.

Accepted Answer

A)   decrease, be indeterminate
B)   increase, be indeterminate
C)   increase, decrease
D)   decrease, increase

Question 20

If a website facilitates the sale of goods by individuals and businesses over the internet, but requires actual photos of every item for sale to be posted instead of a manufacturer's stock picture of the product, demand and supply of products in good condition will shift due to the improved information. If the quantity demanded shifts by more than supply, quantity will likely ___________ and price will likely ___________.

Accepted Answer

A)   decrease, increase
B)   decrease, be indeterminate
C)   increase, be indeterminate
D)   increase, increase

Exam 16: Information, Risk, and Insurance

Why has there been a shift away from the traditional fee-for-service structure in the U.S. health care?

State insurance regulators have sometimes reacted by passing rules that attempt to set low premiums for insurance. But over time, ___________________________ must hold: the average amount received by individuals must equal the average amount paid in premiums.

Ryan lives in Iowa and is completing his fourth year of electrician apprenticeship training. After achieving journeyman status, what will Ryan require from his state government in order to practice his trade?

_____________ can lead to a situation where, even if sellers are faced with a situation of _, they will decide not to cut prices for awhile because they know that buyers in this situation will not react by purchasing a _________ .

The problem of __ in insurance markets is that insurance companies are unable to .

An insurance company is likely to believe that having a major accident is a signal of being a _, and thus try to _____.

Martha has decided to purchase a new home constructed by Crown Builders. In addition to Crown Builder's good reputation in the industry, which of the following likely influenced Martha's decision to purchase a new home?

The presence of _ in transactions involving goods can easily cause a __ if the result is only a relatively small number of buyer and sellers communicating enough information so that they can agree on a price.

When people have insurance against a certain event, the notion that those people are less likely to guard against that event occurring is called a _____________________ .

Regardless of how many services are provided, a health maintenance organization provides health care and is paid ___________________ per person enrolled in the plan.

When buyers use ___ to draw inferences about the quality of products, then markets may have trouble reaching _ and quantity.

_______ in the insurance industry prevents premiums from being much higher than the_ level in the long term.

A ________________ exists when the buyer pays an extra amount and the seller agrees to fix anything that goes wrong for a set time period.

How do insurance companies reduce the risk of moral hazard?

Banks are required by law to pay a small fraction of their deposits to the _____, which goes into a fund that is used to repay depositors their money if the bank should go bankrupt.

Briefly explain the purpose of a lender requiring a pledge of collateral from a borrower in exchange for a loan.