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Test Bank to accompany Rosen’s Public Finance, Seventh Edition Chapter 10
CHAPTER 10 – Social Insurance II: Health Care
Multiple Choice Questions
1. When the average buyer of an insurance policy is likely to have higher risk than others in his class, this is known as
a) adverse selection.
b) moral hazard.
c) asymmetric information.
d) a HMO.
e) none of the above.
2. There are two forms of health care provided by the government: _________ is provided for the poor, and _________ is provided for the elderly.
a) HMO; Medicare
b) PMI; HMO
c) Medicaid; Medicare
d) Medicare; Medicaid
e) SSI; Medicare
3. In the year 2000, what was the percentage of GDP that was expended, in total, on health care?
a) 0.132%
b) 12%
c) 13.2%
d) 19%
e) 22%
4. __________ account(s) for the largest portion of public health expenditure in the United States.
a) Children’s hospitals
b) Universal health coverage
c) Medicaid
d) Medicare
e) Workers’ compensation
5. Health care markets may be inefficient because of
a) poor information.
b) adverse selection.
c) moral hazard.
d) all of the above.
e) none of the above.
6. The __________ level of government accounts for the largest share of health care spending.
a) regional
b) state
c) municipal
d) federal
7. In the year 2002, how much money, in billions of dollars, did the federal government spend on Medicare?
a) 13
b) 253.7
c) 265.9
d) 301
8. If some percentage of a doctor visit must be paid by the patient, even if she has insurance, this is known as
a) an HMO.
b) a cost reimbursement strategy.
c) DMI.
d) a down payment.
e) a co-payment.
9. Most private insurance is provided by
a) employers as a benefit to their employees.
b) the federal government.
c) HMOs.
d) the Office of Health Insurance.
e) all of the above.
10. When people behave in ways that involve increased risk because they have insurance, this is known as
a) adverse selection.
b) moral hazard.
c) asymmetric information.
d) a HMO.
11. How many elderly people are covered by Medicare?
a) one third
b) one half
c) almost all
d) almost none
12. In the United States, universal health care is administered by
a) the federal government.
b) state governments.
c) private insurance companies.
d) hospitals.
e) none of the above.
13. In 1980, 11.1 percent of the population was over the age of 65. What is the percentage currently?
a) 12.4
b) 13.0
c) 14.7
d) 16.3
e) 17.1
14. Which country had the highest percentage of its GDP devoted to health expenditures in the year 2000?
a) Russia
b) Japan
c) United Kingdom
d) United States
e) Canada
15. Generally, managed care means
a) health care is provided by teams, not by an individual doctor.
b) limits are placed on utilization of health care services.
c) health care is provided by the government to all citizens.
d) doctors pick which patients they want to see.
Discussion Questions
1. Suppose that the quantity demanded of visits to a doctor per year is given by X = 12 – 0.05P, where X is the number of visits and P is the price the patient pays for a visit.
a) How many visits would the patient make if he or she had to pay the full price of a visit, $100?
b) How many visits would a patient make if he or she was insured and had to pay only a 15% co-insurance payment per visit?
c) How many visits would the patient make if medical services were free?
2. Refer to Figure 10.1 in your textbook. Suppose that the demand curve Dm can be characterized by the equation M = 2000 – P, where M is the amount of medical services received per year and P is the price. Suppose further that P0 is constant at 800.
a) Find M0.
b) Find M1.
c) How much additional expenditures induced by insurance are created?
3. Suppose there are two drivers, Jermaine and Janet. Jermaine is not a very safe driver. In fact, there is an 80% chance that he will have an accident within the next year. Janet is a relatively safe driver. Her chances of having an accident in the next year are only 20%. If Jermaine is involved in an accident, he will cost the insurance company $30,000. If Janet is involved in an accident, she will only cost the company $5,000. What is the expected pay-out that the company can expect from insuring these two?
4. We have read that the uninsured and the insured behave differently in regard to medical services. Suppose that the insured have a demand curve that can be written as Q = 260 – P/5, where Q is the quantity of medical services and P is the price. Suppose further that the uninsured have a demand curve that can be written as Q = 260 – P/3.
a) At a price of 100 units of medical services, how much will each demand?
b) At a quantity of 50 units, how much will the price be for the insured and uninsured?
5. Suppose that the demand for medical services can be characterized by the equation X = 500 – P/3. Suppose further that the supply of health services can be characterized by the equation X = P – 100.
a) What is the equilibrium quantity and price in the market for health services?
b) In an effort to make health services more affordable, the government restricts the price of health services to be no greater than $250. What will happen to the quantity of health services in the market?
True/False/Uncertain Questions
1. Under federal tax law, employer provided health insurance is not subject to taxation.
2. At any given time, about 35% of the population in the United States lacks health insurance.
3. Part C of Medicare allows eligible individuals to have health care coverage up to $100,000 annually.
4. A fee-for-service health care system will provide the same level of satisfaction as a managed care program.
5. HI (Hospital Insurance) is financed by a payroll tax, while SMI (Supplementary Medical Insurance) is financed out of general revenues.
6. Most private medical insurance is provided through employers as a benefit to their employees.
7. Medicare requires individuals to take a standard health test first, but Medicaid does not.
8. The Kennedy-Kassenbaum Act was designed to help people who change jobs hold onto their health insurance.
9. The health care system currently in place will be dramatically changed in the next four years.
10. One reason for the recent increases in health care costs is the aging of the American population.
Essay Questions
1. We have read in this chapter that people with insurance may be more likely to engage in risky behavior because they are insured. Does it make sense then that there should be an “insurance tax” on people that engage in these types of activities?
2. With the aging of the American population, it might be necessary to reduce the medical benefits to elderly. How do you feel about this idea?
3. What do you feel would be the effect of a mandate that requires all people to purchase health insurance?
Answers to CHAPTER 10 – Social Insurance II: Health Care
Answers to Multiple Choice Questions
1. a
2. c
3. c
4. d
5. d
6. d
7. b
8. e
9. a
10. b
11. c
12. e
13. a
14. c
15. b
Answers to Discussion Questions
1. a) At the full price of $100, she would make X = 12 – 0.05(100) = 7 visits.
b) If she has to pay the 15% co-pay per visit, her price is just $15, so X = 12 – 0.05(15) = 11.25.
c) If services were free, she would make X = 12 – 0.05(0) = 12 visits.
2. a) At a price of $800, M0 = 2,000 – 800 = 1,200.
b) To find M1, we need 0.2(800) = 160. Therefore, M1 = 2,000 – 160 = 1,840.
c) The area we want is abM1M0, which is 800(1,840 – 1,200) = 512,000.
3. The expected payout is 30,000(.8) + 5,000(.2) = $25,000.
4. a) For insured at a price of $100, we have Q = 260 – 100/5 = 240. For the uninsured at a price of $100, we have Q = 260 – 100/3 = 226 2/3.
b) For the insured at a quantity of 50, we have 50 = 260 – P/5 = 1050. For the uninsured at a quantity of 50, we have 50 = 260 – P/3 = 630.
5. a) Set 1,500 – 3X = 100 + X to get that X* = 350 and P* = $450.
b) At a price of $250, a shortage of health services will occur. X* will now be only 150.
Answers to True/False/Uncertain Questions
1. T
2. F
3. F
4. U
5. T
6. T
7. F
8. T
9. U
10. T
Answers to Essay Questions
1. Answers will vary but, in general, this is not a good idea. The essence of this idea is to raise the price of an insurance premium, which might discourage some for engaging in riskier activities.
2. This is a personal question but, unless there is some sort of restructuring of the medical system, it may be necessary to reduce benefits, increase premiums, or limit coverage of certain types of care. One solution may lie in greater emphasis on preventative care against smoking and obesity.
3. Some people do not have insurance because they choose not to, not because they can not afford it. Some people feel that the money spent on insurance would enhance their quality of life more by being spent on other items. Given pre-existing illnesses, it would be very costly for some to afford. Car insurance, however, is mandatory for all who drive; however, those who do not want to pay do not have to drive. With health insurance, this option does not exist.
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