Questions and Answers of Health Economics

If people demand a self-commitment device, it must be Pareto self-improving; otherwise it would not be demanded by utility-maximizing economic agents.Indicate whether each statement is true or false,
Suppose that a long-time nicotine addict who is trying to quite smoking decides he wants a cigarette, but his friends successfully restrain him. The friends’ intervention has an ambiguous effect on
Economists agree that any intervention at time t which improves the utility of people at time t is necessarily a good intervention.Indicate whether each statement is true or false, and justify your
Suppose the local movie theater is offering four different movies on the next four Saturdays. And according to your taste in movies, each Saturday’s movie will be better than the previous week’s
In the model of insurance and uncertainty discussed in the chapter, an individual exhibits declining marginal utility of income if and only if she is risk-averse.Indicate whether the statement is
A consumer with declining marginal utility of income will never prefer actuarially fair, partial insurance to actuarially unfair, full insurance.Indicate whether the statement is true or false, and
Risk-averse consumers always prefer insurance that is actuarially fair but not full to full insurance that is actuarially unfair – but the opposite is true for risk-loving consumers.Indicate
There are no possible utility functions in which a person is indifferent between actuarially fair, full insurance and actuarially fair, partial insurance.Indicate whether the statement is true or
A risk-averse individual prefers a certain outcome to an uncertain outcome with the same expected income.Indicate whether the statement is true or false, and justify your answer.
Insurance represents a transfer of wealth from healthy states to sick states.Indicate whether the statement is true or false, and justify your answer.
When insurance is fair, in a sense, it is also free.Indicate whether the statement is true or false, and justify your answer.
Under partial insurance, income in the sick state with insurance is higher than income in the healthy state.Indicate whether the statement is true or false, and justify your answer.
In an actuarially fair insurance contract, the insurance premium equals the probability of sickness times the payout amount.Indicate whether the statement is true or false, and justify your answer.
Consider an individual whose utility function over income I is U(I), where U is increasing smoothly in I (U' > 0) and convex (U' > 0).a. Draw a utility function in U–I space that fits this
Assume that Jay discovers, to his dismay, that his 2014 healthy-state income will be lower than his 2013 healthy-state income, but that his sick-state income IS is unchanged from 2013 to 2014. Assume
Now consider another individual who is risk-loving instead of risk-averse.a. Is U (I) concave or convex?b. Suppose this person is offered an actuarially fair insurance product that guarantees her a
Consider an individual whose utility function over income I is U(I), where U is increasing smoothly in I and is concave (in other words, our basic assumptions throughout this chapter). Let IS = 0 be
Now consider a different insurance company that does not have the inclination to tailor contracts specifically to individuals. Instead, it will offer a “standard contract” with the premium r
Health insurance is normally seen as a good that is most valuable to sick people, since health expenditures are highest for the sick. Yet, in the basic insurance model discussed in this chapter,
In the basic model of insurance, income is the only input into a person’s utility. This is obviously not realistic. If we relax our assumption that utility is determined only by income levels, can
In the Akerlof model, suppose that the price of used cars is P and the quality of used cars (X) held by sellers varies between and 100. Suppose further that sellers’ utility is given by where M is
In the model, buyers know the utility function of sellers, but do not know anything about the general quality of cars for sale.Indicate whether the statement is true or false, and justify your answer.
If buyers care sufficiently more about cars than do sellers, then there are prices at which transactions can occur. In that scenario, there is no longer any adverse selection (although there still
The Akerlof model indicates that government intervention is the only way to solve the adverse selection problem.Indicate whether the statement is true or false, and justify your answer.
If the quality of cars is normally distributed rather than uniformly distributed, the market will not unravel.Indicate whether the statement is true or false, and justify your answer.
Ultimately, the market unravels because buyers are risk-averse. If buyers were risk-neutral, there would always be prices at which cars would sell.Indicate whether the statement is true or false, and
Review the basic assumptions of the Akerlof model. Assume that, in this market, the quality of cars Xi is distributed as follows:Note that in the discussion above, we analyzed the version of the
Consider again the example where buyers value cars much more than sellers. We assume again thatRecall that, under these assumptions, any price P such that $0a. Will there be any transactions if
Assume that instead of a uniform distribution, in this market, the quality of cars X follows a triangle distribution from 0 to 100 as depicted in Figure 8.7.Given this new distribution, the formula
We assume again the original assumptions of the Akerlof model, but now alter the information assumptions in this exercise. Now assume that neither buyers nor sellers have information about specific
Thirdhand car markets. Consider now two sequential used-car markets. The first is a market for secondhand cars (one previous owner). The second is a market for thirdhand cars (two previous owners).In
Assume that the market for lemons has unraveled, as it did in several of the above examples. Who is harmed by the existence of asymmetric information? Who is helped?
How can we be sure that the price P is the same for all vehicles? Why can’t sellers with excellent cars not simply advertise their high car quality and charge higher prices?
The Akerlof model can be used to model the health insurance market. In this market, which party is analogous to car buyers? Which party is analogous to car sellers? What would it mean for the health
Indicate whether the statement is true or false, and justify your answer.In a Rothschild–Stiglitz model with asymmetric information and heterogeneous risk types, the frail population would be worse
Indicate whether the statement is true or false, and justify your answer.The Rothschild–Stiglitz model predicts that people who own life insurance should have fewer unobserved traits (that is,
Indicate whether the statement is true or false, and justify your answer.In a Rothschild–Stiglitz model separating equilibrium, there is a volume discount for insurance purchases – those who
Indicate whether the statement is true or false, and justify your answer.In a Rothschild–Stiglitz model separating equilibrium, low-risk consumers of insurance are quantity constrained. They cannot
Indicate whether the statement is true or false, and justify your answer.Under certain circumstances in the Rothschild–Stiglitz model, a separating equilibrium cannot exist.
Indicate whether the statement is true or false, and justify your answer.In the Rothschild–Stiglitz model, an individual who is offered a choice between full insurance and no insurance will always
Indicate whether the statement is true or false, and justify your answer.A pooling equilibrium can exist if the contract being offered lies on the same indifference curve as the endowment point of
Indicate whether the statement is true or false, and justify your answer.Under the typical assumptions of the Rothschild–Stiglitz model, there is nothing that an insurance company can do to
Indicate whether the statement is true or false, and justify your answer.Private markets are powerless to combat adverse selection, so the only solution is a government-mandated insurance contract.
Indicate whether the statement is true or false, and justify your answer.The main advantage of a Cochrane insurance contract over a guaranteed renewable contract is that it does not rely on a legally
A medical test that an insurance company could use to distinguish between high- and low-risk types would create an equilibrium in which both high- and low-risk types could have full insurance.
Consider Figure 9.20.a. Explain why the frail-type indifference curve pictured, UF, is not a valid indifference curve.b. Draw your own version of this figure and label two contracts, A and B. Draw
Imagine policymakers in the fictional nation of Pcoria are trying to create a Pcorian National Insurance Program (PNIP) that will bring full insurance to all the citizens of Pcoria.a. Figure 9.21
After the fiasco with the Pcorian National Insurance Program (see Exercise 15), a Pcorian senator proposes a new policy that will go to a referendum of voters in the next election. Below is the text
In this exercise, we will formally show the two properties of indifference curves in IH–IS space we discussed in Section 9.2. To prove that indifference curves are downwardsloping, we calculate the
One major premise of the Rothschild–Stiglitz model is that there is a perfectly competitive market for health insurance. Suppose instead that the market is not perfectly competitive, and in fact
Indicate whether the statement is true, false, or unclear, and justify your answer.One of the major predictions of the Rothschild–Stiglitz model is a positive correlation between risk and insurance
Indicate whether the statement is true, false, or unclear, and justify your answer.On average, observed mortality rates are higher for people who buy life insurance than for people who do not. This
Indicate whether the statement is true, false, or unclear, and justify your answer.In some markets, adverse selection develops over time as customers learn about their own risk levels.
Indicate whether the statement is true, false, or unclear, and justify your answer.Although a firm prediction of Akerlof’s model, the adverse selection death spiral has never been observed in
Indicate whether the statement is true, false, or unclear, and justify your answer.Ex post risk is typically much lower than ex ante risk because uncertainty is largely eliminated by the purchase of
Indicate whether the statement is true, false, or unclear, and justify your answer.Cawley and Philipson (1999) find that, in life insurance markets, there is a bulk discount (that is, people buying
Indicate whether the statement is true, false, or unclear, and justify your answer.Consider an HIV patient who recently started HAART therapy and whose health is improving rapidly as a result.
Consider Table 10.1, which has data on insurance status and medical expenditures for different types of professors at Adverse Selection University (ASU). In 2014, every employee of ASU was offered a
Indicate whether the statement is true, false, or unclear, and justify your answer.The fact that high-risk customers are usually less risk-averse than low-risk customers helps counteract adverse
In the early 2000s, the state of Massachusetts in the US implemented a health reform aimed at enrolling people without health insurance into an insurance plan. The reform required people without
Below is an excerpt from the abstract of a recent National Bureau of Economic Research working paper entitled “Adverse selection and switching costs in health insurance markets: when nudging
The private market for long-term nursing home care is small in the US – only about 10% of the elderly population hold a long-term care insurance policy, despite the substantial financial risk
Indicate whether the statement is true, false, or unclear, and justify your answer.When the price elasticity of demand for health care is zero, health insurance coverage induces no moral hazard.
Indicate whether the statement is true, false, or unclear, and justify your answer.An uninsured patient who incessantly visits his doctor because he always thinks he is getting sick is an example of
Indicate whether the statement is true, false, or unclear, and justify your answer.A woman who uses her fireplace only after she buys homeowner’s insurance is an example of moral hazard.
Indicate whether the statement is true, false, or unclear, and justify your answer.A previously uninsured man who enrolls in his workplace health insurance plan after being diagnosed with multiple
Indicate whether the statement is true, false, or unclear, and justify your answer.Pauly (1974) shows that the socially optimal level of insurance in a market is either full or none, depending on
Indicate whether the statement is true, false, or unclear, and justify your answer.Besides the common practice of charging copayments, health insurers have no successful strategies for combating
Indicate whether the statement is true, false, or unclear, and justify your answer.If a health insurance company could somehow monitor everything a customer does and thinks, it could create a
Indicate whether the statement is true, false, or unclear, and justify your answer.It would be easy for private health insurers to eliminate moral hazard by redesigning insurance contracts, but they
Indicate whether the statement is true, false, or unclear, and justify your answer.Moral hazard is mostly a problem in countries with universal insurance programs like the UK.
Indicate whether the statement is true, false, or unclear, and justify your answer.The fact that more free-plan participants logged ER visits for broken bones than cost sharing plan participants in
Consider Figure 11.10, which shows the locus of feasible contracts for the population of the nation of Pcoria.a. In which corner of this diagram (northeast, southeast, northwest, or southwest) is
Indicate whether the statement is true, false, or unclear, and justify your answer.An all-you-can-eat buffet is a classic example of moral hazard, because a price distortion induces overconsumption.
Consider Figure 11.10, which shows the locus of feasible contracts for the population of the nation of Pcoria. The indifference curves are concave, which represents the fact that consumers want full
Some economists have argued that moral hazard and monopolistic health care markets are two socially inefficient problems that partially cancel each other out.a. Relative to the optimal level of
An important distinction in health insurance is between the list price (PL) and out-of-pocket price (PP) of a medical good or service. The list price is the official price that the provider charges
A consumer’s demand for a medical service is Q=100−PP where PP is the out-of-pocket price she actually faces. She is considering four different insurance options: uninsurance, full insurance, a
Consider the basic Rothschild–Stiglitz model with asymmetric information and robust and frail customers.a. Suppose the government imposes a Wellness Tax, τ > 0, on robust and frail types but
Review Figure 9.18, which depicts a separating equilibrium breaking down. In this figure, the separating equilibrium breaks down because the zero-profit line is too far to the right. But this is not
Long-term disability (LTD) insurance policies cover workers who become disabled and can no longer perform their job functions. Workers who think they qualify as disabled can submit a claim to their
Below is an excerpt of the abstract of a recent journal article entitled “Do social connections reduce moral hazard? Evidence from the New York City taxi industry” by C. Kirabo Jackson and Henry
Indicate whether each statement is true or false, and justify your answer.In the US, drug companies receive a patent of 100 years for each drug they develop. This allows them a prolonged legal
Indicate whether each statement is true or false, and justify your answer.Phase III clinical trials are a minor part of the drug development process in the US.
Indicate whether each statement is true or false, and justify your answer.If a government wishes to maximize the rate of pharmaceutical innovation, it should offer non-expiring patents to drug
Indicate whether each statement is true or false, and justify your answer.Price controls decrease the innovation rate for drugs but make existing drugs more affordable.
Indicate whether each statement is true or false, and justify your answer.The US government has harnessed the power of induced innovation to create cures for orphan diseases.
Indicate whether each statement is true or false, and justify your answer.Most economists think that innovation is not random, and that pharmaceutical companies can steer their research toward profit
Indicate whether each statement is true or false, and justify your answer.After passage of the Kefauver–Harris Amendment in 1962, the number of new chemical entities introduced into the US market
Indicate whether each statement is true or false, and justify your answer.The Food and Drug Administration (FDA) decides whether to approve a drug for use in the US based in part on whether each drug
Suppose there is a test, φ, that yields the distribution of test outcomes for good drugs and bad drugs seen in Figure 12.9. In this case, is it possible to create a rule for accepting and rejecting
Indicate whether each statement is true or false, and justify your answer.Phase II drug trials are conducted on animals, while Phase III drug trials are conducted on healthy volunteers. Both are
Indicate whether each statement is true or false, and justify your answer.The approval of Vioxx, a painkiller that was taken off the market in 2004 because it was implicated in several cardiac
Suppose there is a test, x, that yields the distribution of test outcomes for good drugs and bad drugs shown in Figure 12.10. The bad drug curve b(x) is defined aswhile the good drug curve g(x) is
Bhattacharya and Vogt (2003) study the pricing strategies of pharmaceutical companies that bring new drugs to market. They observe that new drugs often debut at relatively low prices and get more
Suppose that drugs can be assigned a value W from 0 to 100 that indicates their quality. Perhaps a drug with W = 1 is a hangnail medication that barely works, while a drug with W = 99 is a
The 1992 drama film Lorenzo’s Oil is based on the true story of Lorenzo Odone, who was diagnosed with a hereditary orphan disease called adrenoleukodystrophy (ALD). His diagnosis induced his
Compare the tradeoff implicit in allowing the FDA to regulate pharmaceutical markets with the tradeoff implicit in allowing the American Medical Association to restrict the supply of doctors in the
List the costs and benefits of the following hypothetical policies.a. The US government offers a $ 5 billion prize to the first drug company that develops a cure for Alzheimer’s disease.b. The
Indicate whether each statement is true or false, and justify your answer.A Laspeyres price index of health care inflation typically overestimates year-to-year increases in the price of health.

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