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Macroeconomics 2017 (Hubbard)

Chapter 5 The Economics of Health Care
5.1 The Improving Health of People in the United States
1) In 2015, the average life expectancy at birth in the United Kingdom and other high-income countries
was around ________ years.
A) 60
B) 70
C) 80
D) 90
Answer: C
Diff: 1 Page Ref: 218/148
Topic: Health in the United States
*: Recurring
Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist.
2) In 2015, infant mortality in the United States was ________ per 1,000 live births.
A) 6.2
B) 45.4
C) 82.7
D) 228.9
Answer: A
*: Recurring
3) On average, people in low-income countries ________ than people in high-income countries.

A) have a longer life expectancy
B) are subject to a lower infant mortality rate
C) are shorter
D) are exposed to fewer severe diseases
Answer: C
*: Recurring
AACSB: Analytical thinking
1
Copyright © 2017 Pearson Education, Inc.
4) In 2015, the average height of adult males in the United States was
A) 5' 7.0".
B) 5' 9.5".
C) 6' 0.0".
D) 6' 4.75".
Answer: B
*: Recurring
5) Between 1981 and 2013, deaths from kidney disease increased largely due to the effects of
A) increasing obesity.
B) increasing alcohol consumption.
C) increased smoking.
D) increased pollution.
Answer: A
*: Recurring
6) In the United States since 1900, life expectancy at birth has ________ and the death rate has ________.
A) increased; increased
B) increased; decreased
C) decreased; increased
D) decreased; decreased
Answer: B
*: Recurring
7) In the United States from 1981 to 2013, deaths from which of the following increased?
A) cancer
B) kidney disease
C) heart attacks
D) strokes
Answer: B
*: Recurring
8) In the United States from 1981 to 2013, deaths from ________ increased largely due to the effects of
increasing obesity.
A) strokes
B) cancer
2
C) heart attacks
D) diabetes
Answer: D
*: Recurring
3
9) Which of the following did not contributed to the overall decline in death rates in the United States
since 1981?
A) a decline in smoking
B) the decline in the population
C) the availability of new prescription drugs
D) new surgical techniques
Answer: B
*: Recurring
10) Health problems prevent people from working harder, which can lower a country's total income.
This indicates that in effect, health problems
A) are a primary cause of price decreases.
B) increase the incentive to work.
C) shift a country's production possibilities frontier inward.
D) decrease consumer surplus.
Answer: C
*: Recurring
Learning Outcome: Micro-19: Explain the concept of efficiency in the economy and obstacles to achieving it.
11) Changes in the health of the average person are relatively unimportant as an indicator of changes in
the standard of living.
Answer: FALSE
*: Recurring
12) Since 1981, deaths from cardiovascular diseases have decreased in the United States.
Answer: TRUE
*: Recurring
13) The overall mortality rate in the United States has declined for the past 30 years.
Answer: TRUE
*: Recurring
4
14) Over time, people in the United States and other high-income countries have, on average, become
taller, which is an indication that their nutritional status has improved.
Answer: TRUE
*: Recurring
15) Briefly describe changes in life expectancy, average height, and infant mortality in the United States
since 1850.
Answer: Life expectancy has increased from 38.3 years in 1850 to 79.6 years in 2015. The average height
of adult males has increased from 5'7" in 1850 to 5'9.5" in 2015. Infant mortality has dropped from 228.9
per 1,000 live births in 1850 to 6.2 per 1,000 live births in 2015.
*: Recurring
16) How can increases in a country's total income improve health?

Answer: Increases in a country's total income make it possible for the country to afford better
sanitation, more food, and a better system for distributing the food. Higher income also allows the
country to devote more resources to research and development, including medical research.
*: Recurring
17) Explain why the rates of death due to kidney disease and diabetes have slightly increased in the
United States since 1981.
Answer: An increase in obesity is generally believed to be the cause of the increase in death rates for
kidney disease and diabetes since 1981.
*: Recurring
5
5.2 Health Care around the World
1) In the United States in 2014, the percentage of people who received health insurance through their
employer was about
A) 15%.
B) 36%.
C) 55%.
D) 83%.
Answer: C
Topic: Health Care Around the World
*: Recurring
2) In the United States in 2014, the percentage of people with some form of health insurance was about
A) 10%.
B) 36%.
C) 55%.
D) 90%.
Answer: D
*: Recurring
3) In the United States in 2014, the percentage of firms that employed more than 200 workers and did
not offer health insurance as a fringe benefit to the workers was about
A) 2%.
B) 29%.
C) 44%.
D) 98%.
Answer: A
*: Recurring
4) In 2014, ________ of the uninsured were younger than age 35.

A) about 10 percent
B) less than one-third
C) over half
D) almost 85 percent
Answer: C
*: Recurring
6
5) In the United States in 2014, about ________ of uninsured people live in families in which at least one
member has a job.
A) 12%.
B) 38%.
C) 70%.
D) 98%.
Answer: C
*: Recurring
6) In the United States in 2014, the percentage of firms that employed between 3 and 199 workers and
did not offer health insurance as a fringe benefit to the workers was about
A) 2%.
B) 46%.
C) 61%.
D) 98%.
Answer: B
*: Recurring
7) In the United States in 2014, a majority of people received health care through
A) Medicare.
B) Medicaid.
C) their employers.
D) individually purchased insurance policies.
Answer: C
*: Recurring
8) Health insurance plans which typically reimburse doctors and hospitals with payment for each
service they provide are known as
A) fee-for-service plans.
B) preferred provider organizations.
C) single-health-payer systems.
D) health maintenance organizations.
Answer: A
*: Recurring
7
9) Health insurance plans which typically reimburse doctors mainly by paying ________ are known as
health maintenance organizations.
A) a fee for each individual service provided
B) a fee for each individual office visit
C) an escalating fee based on the number of patients being treated
D) a flat fee per patient
Answer: D
*: Recurring
10) The health care system in ________ is referred to as a single-payer health care system, and is a
system in which the government provides national health insurance to all residents.
A) Canada
B) Japan
C) the United Kingdom
D) the United States
Answer: A
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of
such intervention.
11) The health care system in ________ is referred to as a universal health insurance system, under
which every resident is required to enroll in either a private or the government-provided health
insurance program.
A) Canada
B) Japan
Answer: B
*: Recurring
such intervention.
8
12) The health care system in ________ is referred to as socialized medicine, under which the
government owns most of the hospitals and employs most of the doctors.
A) Canada
B) Japan
Answer: C
*: Recurring
such intervention.
13) Most doctors are employed by the government and most hospitals are owned by the government in
A) Canada.
B) Japan.
C) the United Kingdom.
D) the United States.
Answer: C
*: Recurring
14) In which of the following countries does health insurance not pay for most preventive care
procedures?
A) Canada
B) Japan
Answer: B
*: Recurring
15) Substantial co-payments are typically not required as a part of the health care system in
A) Canada and the United Kingdom.
B) Japan and Canada.
C) the United States and Japan.
D) Japan and the United Kingdom.
Answer: A
*: Recurring
9
16) The largest government-run health care system in the world, with 1.7 million employees, is the
National Health Service (NHS) in the United Kingdom. The NHS receives its funding primarily from
A) tariffs.
B) the World Health Organization.
C) income taxes.
D) private businesses.
Answer: C
*: Recurring
Learning Outcome: Micro-23: Discuss the economics of public goods and common resources.
17) Typically, the ________ in a country, the higher the level of spending per person on health care.
A) higher the level of income per person
B) larger the population
C) higher the level of income taxes
D) lower the median age of the population
Answer: A
*: Recurring
Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets.
18) Typically, the lower the level of income per person in a country, the lower the level of spending per
person on health care. This relationship between income and spending indicates that health care is a
A) normal good.
B) inferior good.
C) luxury.
D) necessity.
Answer: A
*: Recurring
19) In ________, health care spending per person based on income per person is significantly higher
than the average for most other countries.
A) Austria
B) Canada
C) Norway
Answer: D
*: Recurring
Learning Outcome: Micro-11: Explain how to measure consumer preferences and discuss the major theories about
consumer choice.
10
20) Of the following high-income countries, which has the highest life expectancy at birth?
A) Canada
B) Japan
Answer: B
*: Recurring
21) Of the following high-income countries, which has the lowest infant mortality rate?
A) Canada
B) Japan
Answer: B
*: Recurring
22) Of the following high-income countries, which has the highest mortality ratio for cancer?
A) Canada
B) Japan
Answer: B
*: Recurring
23) Of the following high-income countries, which has the highest obesity rate?
A) Canada
B) Japan
Answer: D
*: Recurring
11
24) Of the following high-income countries, which has the highest male life expectancy at age 65?
A) Canada
B) Japan
Answer: B
*: Recurring
25) Of the following high-income countries, which has the highest female life expectancy at age 65?
A) Canada
B) Japan
Answer: B
*: Recurring
26) In the United States in 2014, the health care industry was the largest employer in ________ states.
A) 7
B) 27
C) 34
D) 48
Answer: C
Diff: 1 Page Ref: 222-223/152-153
Special Feature: Making the Connection: The Increasing Importance of Health Care in the U.S. Economy
27) A majority of people in the United States do not have private health insurance.
Answer: FALSE
*: Recurring
28) Although most large firms in the United States offer their employees health insurance, fewer than
two-thirds accept it.
Answer: TRUE
*: Recurring
12
29) On average, people in the United States spend a smaller percentage of their income on health care
than do people in most other countries.
Answer: FALSE
*: Recurring
consumer choice.
30) The United Kingdom has a health care system under which the government owns most of the
hospitals and employs most of the doctors.
Answer: TRUE
*: Recurring
consumer choice.
31) Japan has a single-payer health care system in which the government provides national health
insurance to all Japanese residents.
Answer: FALSE
*: Recurring
consumer choice.
32) What is health insurance?

Answer: Health insurance is a contract under which a buyer agrees to make payments, or premiums, in
exchange for the provider agreeing to pay some or all of the buyer's medical bills.
Diff: 1 Page Ref: 220-221/150-151
Topic: Health Care
*: Recurring
33) Briefly describe the types of health care systems in Canada, Japan, and the United Kingdom.
Answer: Canada has a single-payer health care system, in which the government provides health
insurance to all of the country's residents.
Japan has a system of universal health insurance under which every resident of Japan is required to
either enroll in a non-profit health insurance society or enroll in the health insurance program provided
by the national government.
The United Kingdom has socialized medicine, a system in which the government owns most of the
hospitals and employs most of the doctors.
*: Recurring
13
34) Health care is generally considered a normal good. Briefly explain what you would expect to see
happen to spending on health care over time, with health care being considered as a normal good.
Answer: With a normal good, as income increases, spending on the good also increases. Since income
levels tend to increase over time, you should expect to see spending on health care increase over time.
Diff: 2 Page Ref: 224-225/154-155
*: Recurring
5.3 Information Problems and Externalities in the Market for Health Care
1) In the market for insurance,

A) buyers often have more information than sellers.
B) sellers often have better information than buyers.
C) sellers are protected from lawsuits brought by buyers.
D) demand is perfectly inelastic because, by law, home owners and automobile drivers must have
insurance.
Answer: A
Topic: Asymmetric Information
*: Recurring
Learning Outcome: Micro-21: Describe methods for countering and avoiding risk.
2) What is the term that describes a situation in which one party to an economic transaction has less
information than the other party?
A) inefficient market hypothesis
B) asymmetric information
C) unequal market structure
D) monopsony
Answer: B
*: Recurring
3) Pricing insurance policies is made difficult because buyers have more information than sellers. This
difficulty is an example of
A) moral hazard.
B) adverse selection.
C) asymmetric information.
D) the free-rider problem.
Answer: C
*: Recurring
14
4) The Pre-Existing Condition Insurance Plan is a federally administered part of the Affordable Care
Act, and is designed for people with pre-existing medical conditions to obtain insurance. By offering
health insurance to all U.S. citizens with pre-existing medical conditions, the Pre-Existing Condition
Insurance Plan
A) eliminates asymmetric information for the insurer, but not for the insured.
B) eliminates asymmetric information for the insured, but not for the insurer.
C) eliminates asymmetric information for both the insurer and the insured.
D) reduces, but does not eliminate, asymmetric information for both the insurer and the insured.
Answer: D
*: Recurring
5) In the United States, the bulk of health care spending is paid by health insurance companies. Such a
system is also called a ________ where consumers of health care pay a nominal fee and the rest is paid
by the health insurance provider.
A) universal health care system
B) third-party payer system
C) socialized medicine system
D) single-payer system
Answer: B
Topic: Health Care
*: Recurring
such intervention.
6) Consumers usually pay less than the total cost of medical treatment because
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.
Answer: A
Topic: Health Care
*: Recurring
15
7) If a hospital knows that an insurance company will pay for most of a patient's bill, the hospital has
more of an incentive to require additional medical procedures and tests, even if the patient may not
require them. This is an example of
A) moral hazard.
B) the principle-agent problem.
C) asymmetric information.
D) adverse selection.
Answer: B
Topic: Principal-Agent Problem
*: Recurring
8) The principal-agent problem is a problem

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.
Answer: B
*: Recurring
9) In the principal-agent relationship, the principal is

A) the owner of a resource that has hired a third party to act in the best interest of that third party.
B) the person who is placed in control over resources that are not his own, with a contractual obligation
to use these resources in the interests of some other party.
C) the person who is placed in control over resources that are not his own and agrees to compensate the
resource owner in the event of outcomes that do not satisfy the resource owner.
D) the person who places his resources in professional hands in exchange for the professional's promise
to act on the resource owner's behalf.
Answer: D
*: Recurring
16
10) The study of the problems due to asymmetric information was begun when economists analyzed
which type of market?
A) the market for citrus fruit
B) the market for insurance
C) farmers' markets
D) the market for automobiles
Answer: D
*: Recurring
11) Which of the following Nobel laureates became known for the study of asymmetric information?
A) Gary Becker
B) Michael Spence
C) George Ackerlof
D) Ronald Coase
Answer: C
*: Recurring
12) Adverse selection will occur in a market as a result of

A) asymmetric information.
B) moral hazard.
C) the sale of "lemons."
D) rational ignorance.
Answer: A
Topic: Adverse Selection
*: Recurring
13) Which of the following is an example of adverse selection?

A) The odds of a fire rise after a building is insured because the person with fire insurance is likely to
pay less attention to fire hazards.
B) Someone who did not install fire alarms and a sprinkler system in a building he owns buys insurance
for the building.
C) Someone with automobile insurance drives more recklessly than someone without insurance.
D) People prefer to buy new cars rather than used cars.
Answer: B
*: Recurring
17
14) Why is the study of asymmetric information associated with the market for "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."
Answer: C
Topic: The Market for Lemons
*: Recurring
15) Because of asymmetric information, most used cars that are offered for sale will be sold for prices
that are greater than their true value. Because of this fact, the used car market falls victim to
A) the free-rider problem.
B) deadweight loss and economic inefficiency.
C) a surplus of used cars.
D) adverse selection.
Answer: D
*: Recurring
16) Suppose that in a market for used cars, there are good used cars and bad used cars (lemons).
Consumers are willing to pay as much as $9,000 for a good used car but only $3,000 for a lemon. Sellers
of good used cars value their cars at $7,500 each and sellers of lemons value their cars at $1,500 each.
Buyers cannot tell if a used car is reliable or is a lemon. Based on this information, what is the likely
outcome in the market for used cars?
A) Sellers of good used cars will drop out of the market.
B) Sellers of good used cars will incur losses.
C) Sellers of lemons will drop out of the market.
D) Used cars will sell for $6,000.
Answer: A
*: Recurring
18
17) Adverse selection in the market for health insurance arises because
A) many insurance companies care more about profits than they do about providing services for their
customers in the event of illness.
B) the federal government intervenes in insurance markets by controlling prices and reimbursement
policies.
C) insurance companies are not allowed to charge premiums that are high enough to insure against
"worst-case" illness.
D) buyers of insurance know more than insurance companies about the likelihood of an illness for
which buyers want insurance.
Answer: D
*: Recurring
18) Economists refer to the actions people take after they have entered into a transaction that makes the
other party to the transaction worse off as
A) bad faith.
B) economic inefficiency.
C) moral hazard.
D) market failure.
Answer: C
Topic: Moral Hazard
*: Recurring
19) In the 1973 movie Save the Tiger, Jack Lemmon plays Harry Stoner, the CEO of a clothing
manufacturer whose business has fallen on hard times. In one of the key scenes of the movie, Stoner
tries to convince his partner that they should hire someone to burn one of their buildings in order to
collect on their insurance policy. Harry Stoner's actions are an example of
A) adverse selection.
B) moral hazard.
C) self-interest.
D) asymmetric information.
Answer: B
Topic: Moral Hazard
*: Recurring
19
20) In the 1973 movie Save the Tiger, Jack Lemmon plays Harry Stoner, the CEO of a clothing
manufacturer whose business has fallen on hard times. At one point in the movie, Stoner convinces his
partner to hire someone to burn one of their buildings to collect on their insurance policy. What term
refers to the information problem that led the insurance company to sell a policy for this building to
Stoner and his partner?
A) rational ignorance
B) the principal-agent problem
C) adverse selection
D) moral hazard
Answer: C
Special Feature: Don't Let This Happen to You: Don't Confuse Adverse Selection with Moral Hazard
21) Two consequences of asymmetric information are adverse selection and moral hazard. An important
distinction between the two is
A) adverse selection exists prior to the completion of a transaction while moral hazard occurs after the
transaction is completed.
B) moral hazard exists prior to the completion of a transaction while adverse selection occurs after the
transaction is completed.
C) adverse selection leads to an inefficient quantity while moral hazard leads to an efficient quantity.
D) moral hazard leads to an inefficient quantity while adverse selection leads to an efficient quantity.
Answer: A
Topic: Adverse Selection and Moral Hazard
22) The difference between adverse selection and moral hazard is that
A) moral hazard happens at the time parties enter into a transaction; adverse selection occurs after the
transaction takes place.
B) adverse selection happens at the time parties enter into a transaction; moral hazard occurs after the
transaction takes place.
C) moral hazard is the motive that is behind one party entering into a transaction with another party.
Adverse selection refers to the other party being harmed by the transaction.
D) moral hazard refers to the likelihood that a transaction will lead one party to be better off at the
expense of the other party to the transaction. Adverse selection refers to the consequences of the
transaction after it has occurred.
Answer: B
20
23) ________ occurs when one party takes advantage of having more information than another party
about the attributes of the good or service they will exchange.
A) A negative externality
B) Moral hazard
C) A transaction cost
D) Adverse selection
Answer: D
*: Recurring
24) ________ occurs when actions taken by one party to a transaction are different from what the other
party expected at the time of the transaction.
A) Adverse selection
B) Risk aversion
C) Fraud
D) Moral hazard
Answer: D
Topic: Moral Hazard
*: Recurring
25) Suppose that in a market for used cars, there are good used cars and bad used cars (lemons).
Consumers are willing to pay as much as $6,000 for a good used car but only $1,000 for a lemon. Sellers
of good used cars value their cars at $5,000 each and sellers of lemons value their cars at $800 each.
Buyers cannot tell if a used car is reliable or is a lemon. Based on this information, what is the likely
outcome in the market for used cars?
A) Both good used cars and lemons will sell for $4,500 each.
B) Only lemons will sell, for $800 each.
C) Both good used cars and lemons will sell for $1,000 each.
D) Most used cars offered for sale will be lemons.
Answer: D
*: Recurring
21
26) Health insurance markets have a problem with insuring people who are "poor health risks" while
many people who are "good health risks" do not buy insurance. This problem is an example of
A) moral hazard.
B) adverse selection.
C) market signaling.
D) asymmetric information.
Answer: B
*: Recurring
27) Because of the ________ of vaccinations, economic efficiency would be improved if more people
were vaccinated.
A) negative externality
B) positive externality
C) moral hazard
D) adverse selection
Answer: B
Topic: Positive Externality
*: Recurring
22
Figure 5-1
Figure 5-1 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.
28) Refer to Figure 5-1. Marginal private benefit is represented by which curve?
A) D1
B) D2
C) Supply
D) All of the above represent marginal private benefit.
Answer: A
*: Recurring
29) Refer to Figure 5-1. Marginal social benefit is represented by which curve?
A) D1
B) D2
C) Supply
D) All of the above represent marginal social benefit.
Answer: B
*: Recurring
23
30) Refer to Figure 5-1. The market equilibrium price is
A) $60.
B) $50.
C) $40.
D) < $40.
Answer: C
*: Recurring
31) Refer to Figure 5-1. The market equilibrium quantity is ________ thousand vaccinations.
A) 200
B) 400
C) 600
D) > 600
Answer: B
*: Recurring
32) Refer to Figure 5-1. The efficient equilibrium price is

A) $60.
B) $50.
C) $40.
D) < $40.
Answer: B
*: Recurring
33) Refer to Figure 5-1. The efficient equilibrium quantity is ________ thousand vaccinations.
A) 200
B) 400
C) 600
D) > 600
Answer: C
*: Recurring
24
34) Refer to Figure 5-1. At the efficient equilibrium,
A) economic surplus is maximized.
B) economic surplus is minimized.
C) economic surplus is zero.
D) economic surplus is negative.
Answer: A
*: Recurring
35) Refer to Figure 5-1. At the market equilibrium,

A) the marginal cost is equal to the marginal benefit.
B) the marginal cost is greater than the marginal benefit.
C) the marginal cost is less than the marginal benefit.
D) the marginal cost is zero.
Answer: C
*: Recurring
36) Refer to Figure 5-1. At the market equilibrium, the deadweight loss is equal to
A) $0.
B) $500,000.
C) $1,000,000.
D) $2,000,000.
Answer: D
*: Recurring
37) Some economists have argued that certain characteristics of the delivery of health care justify
government intervention. One of these characteristics is
A) health care is a public good.
B) health care is nonrivalrous and nonexcludable.
C) health care generates negative externalities.
D) health care generates positive externalities.
Answer: D
Topic: Health Care
*: Recurring
25
38) Under current tax law individuals do not pay taxes on health insurance benefits they receive from
their employers. As a result,
A) the federal government spends more than it receives in tax revenue.
B) individuals are encouraged to want generous health coverage that reduces their incentives to cut
costs.
C) the quality of health care provided is less than it would be if benefits were taxed.
D) politicians are encouraged to raise income and payroll taxes.
Answer: B
Topic: Health Care
*: Recurring
39) Adverse selection is a situation in which one party to an economic transaction has less information
than the other party.
Answer: FALSE
*: Recurring
40) One consequence of adverse selection in the market for used cars is that most used cars sold will be
lemons.
Answer: TRUE
*: Recurring
41) Insurance companies use deductibles and coinsurance to reduce moral hazard.
Answer: TRUE
Topic: Moral Hazard
*: Recurring
42) Under current U.S. tax laws, individuals do not pay taxes on health insurance benefits they receive
from their employers.
Answer: TRUE
Topic: Health Care
*: Recurring
26
43) The situation in which one party to a transaction takes advantage of knowing more than the other
party to the transaction is known as adverse selection.
Answer: TRUE
*: Recurring
44) A doctor pursuing the interests of his patients rather than his own interests is an example of the
principal-agent problem.
Answer: FALSE
*: Recurring
45) Adverse selection refers to the actions people take after they have entered into a transaction that
make the other party to the transaction worse off.
Answer: FALSE
*: Recurring
46) In a market with positive externalities, the market equilibrium price will be greater than the efficient
equilibrium price.
Answer: FALSE
*: Recurring
47) In a market with positive externalities, the market equilibrium quantity will be less than the efficient
equilibrium quantity.
Answer: TRUE
*: Recurring
48) Vaccinations tend to result in a negative externality.

Answer: FALSE
*: Recurring
27
49) College education tends to result in a positive externality because the recipient receives the full
benefit of the education.
Answer: FALSE
*: Recurring
50) What is asymmetric information?

Answer: Asymmetric information occurs when one party to an economic transaction has less
information than the other party.
*: Recurring
51) Two key consequences of asymmetric information are adverse selection and moral hazard. Define
each concept, provide one example of each, and explain how the two concepts differ.
Answer: Adverse selection is the situation in which one party to a transaction takes advantage of
knowing more than the other party to the transaction. Moral hazard refers to the actions people take
after they enter into a transaction that make the other party to the transaction worse off. An important
difference between the two is that adverse selection refers to what happens at the time of entering into a
transaction (for example, a reckless driver buys automobile insurance) while moral hazard refers to
what happens after entering into the transaction (for example, the insured driver drives his car off a
highway and into a tree).
Diff: 2 Page Ref: 226-227/156-157
*: Recurring
52) Suppose you see a 2012 Ford Mustang GT advertised in the local newspaper for $15,000. If you
knew the car was reliable, you would be willing to pay $17,000 for it. If you knew the car was
unreliable, you would only be willing to pay $12,000 for it. Under what circumstances should you buy
the car?
Answer: Because of the lemons problem you should buy the car only if the advertisement is placed by a
car dealer with a good reputation or by an individual you know well enough to trust, if you can cheaply
determine that it isn't a lemon (for example, by an inspection), or if you'll receive a solid warranty
against defects.
*: Recurring
28
53) How do adverse selection and moral hazard affect the market for insurance?
Answer: Both adverse selection and moral hazard drive up the price of insurance. People with a higher
probability of the insurable outcome are the ones who buy the insurance (adverse selection), and having
insurance increases the probability of the insurable outcome occurring because the person no longer
tries as hard to avoid the outcome (moral hazard). Adverse selection and moral hazard may drive the
price up so much that some people don't want to buy the insurance.
Diff: 2 Page Ref: 227-228/157-158
*: Recurring
Figure 5-2
Figure 5-2 shows the effect of a positive externality on the market for vaccinations.
54) Refer to Figure 5-2. On the above graph, identify the market equilibrium price and quantity, the
efficient equilibrium price and quantity, and the value of the deadweight loss resulting from too few
people receiving vaccinations.
Answer: The market equilibrium price and quantity are $75 and 550.
The efficient equilibrium price and quantity are $110 and 800.
The deadweight loss is $8,125.
*: Recurring
29
5.4 The Debate over Health Care Policy in the United States
1) In 2015, health care's share of gross domestic product in the United States was about
A) 6.5 percent.
B) 18 percent.
C) 45 percent.
D) 62.5 percent.
Answer: B
Topic: Health Care
*: Recurring
2) In the United States, out-of-pocket spending on health care per person

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.
Answer: B
Topic: Health Care
*: Recurring
3) Compared to the United States, health care spending per person in other high-income countries has
been
A) growing at a slower rate.
B) growing at a faster rate.
C) growing at approximately the same rate.
D) declining at approximately the same rate.
Answer: A
Topic: Health Care
*: Recurring
30
4) By the year 2015, health care spending on Medicare, Medicaid, and other U.S. government programs
as a percentage of GDP had reached a level of
A) 2.2 percent.
B) 6 percent.
C) 17.5 percent.
D) 21.5 percent.
Answer: B
Topic: Health Care
*: Recurring
5) In 1960, out-of-pocket spending on health care in the United States was

A) 2.2 percent.
B) 6 percent.
C) 48 percent.
D) 64 percent.
Answer: C
Topic: Health Care
*: Recurring
6) Federal and state governments in the United States pay for ________ of health care spending.
A) less than 10 percent
B) approximately 34 percent
C) just over half
D) more than 80 percent
Answer: C
Topic: Health Care
*: Recurring
7) The Congressional Budget Office estimates that ________ account(s) for less than 1 percent of health
care costs in the United States.
A) the aging population
B) uninsured patients receiving treatment in hospital emergency rooms that could have been provided
less expensively at doctor's offices
C) the payments to settle malpractice lawsuits and the premiums doctors pay for malpractice insurance
D) advances in medical technology
Answer: C
Topic: Health Care
*: Recurring
31
8) ________ account(s) for between 1 and 4 percent of health care costs in the United States.
A) The aging population
B) Uninsured patients receiving treatments at hospital emergency rooms that could have been provided
less expensively at doctor's offices
C) The payments to settle malpractice lawsuits and the premiums doctors pay for malpractice insurance
D) Advances in medical technology
Answer: B
Topic: Health Care
*: Recurring
9) Growth in labor productivity in the economy as a whole has been ________ labor productivity in
health care.
A) approximately equal to
B) slightly faster than
C) almost twice as slow as
D) more than twice as fast as
Answer: D
Topic: Health Care
*: Recurring
10) Of the following, the most rapid rise in health care costs in the United States can be attributed to
A) the cost of malpractice insurance.
B) the cost to treat uninsured patients.
C) slow growth in labor productivity in health care.
D) the cost of malpractice lawsuit settlements.
Answer: C
Topic: Health Care
*: Recurring
11) ________ tended to increase spending on health care in the United States.
A) The aging of the U.S. population, rather than advances in medical technology, has
B) Advances in medical technology, rather than the aging of the U.S. population, has
C) The aging of the U.S. population, as well as advances in medical technology, have
D) Neither the aging of the U.S. population, nor advances in medical technology, have
Answer: C
Topic: Health Care
*: Recurring
32
12) In the United States, health care spending on people ________ is six times greater than on people
________.
A) under age 3; over age 65
B) aged 18 to 24; 25 to 44
C) over age 65; aged 18 to 24
D) over age 65; aged 25 to 44
Answer: C
Topic: Health Care
*: Recurring
13) The number of people receiving Medicare is expected to grow to 74 million by the year
A) 2105.
B) 2020.
C) 2025.
D) 2075.
Answer: C
Topic: Health Care
*: Recurring
14) The Congressional Budget Office estimates that ________ of the increase in federal spending on
Medicare and Medicaid over the next 75 years will be due to increases in the cost of providing health
care.
A) very little
B) less than half
C) most
D) all
Answer: C
Topic: Health Care
*: Recurring
15) In the United States, consumers usually pay less than the true cost of medical treatment because of
A) adverse selection.
B) rising insurance premiums.
C) third-party payers.
D) rising insurance deductibles.
Answer: C
Topic: Health Care
*: Recurring
33
16) Because consumers who have insurance provided by their employers usually only pay a deductible
for a visit to the doctor's office, they ________ of health care services than they would if they paid a
price that better represented the true cost of providing the service.
A) demand a larger quantity
B) demand a smaller quantity
C) supply a larger quantity
D) supply a smaller quantity
Answer: A
Topic: Health Care
*: Recurring
17) Doctors have ________ incentive to control their costs when consumers ________ for a visit to the
doctor's office.
A) more; only pay a deductible
B) less; only pay a deductible
C) less; pay entirely out of pocket
D) more; have a third-party payer that pays
Answer: B
Topic: Health Care
*: Recurring
34
Figure 5-3
Figure 5-3 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.
18) Refer to Figure 5-3. If consumers paid the full price of medical services, the price they would pay is
A) $40.
B) $55.
C) $65.
D) > $65.
Answer: B
Topic: Health Care
*: Recurring
19) Refer to Figure 5-3. If consumers paid the full price of medical services, the equilibrium quantity
would be
A) 400.
B) 800.
C) 1,200.
D) > 1,200.
Answer: B
Topic: Health Care
*: Recurring
35
20) Refer to Figure 5-3. With insurance and a third-party payer system, what price do doctors receive for
medical services?
A) $40
B) $55
C) $65
D) > $65
Answer: C
Topic: Health Care
*: Recurring
21) Refer to Figure 5-3. With insurance and a third-party payer system, what price do consumers pay for
medical services?
A) $40
B) $55
C) $65
D) > $65
Answer: A
Topic: Health Care
*: Recurring
22) Refer to Figure 5-3. With insurance and a third-party payer system, the equilibrium quantity of
medical services is
A) 400.
B) 800.
C) 1,200.
D) > 1,200.
Answer: C
Topic: Health Care
*: Recurring
23) Refer to Figure 5-3. The efficient price of medical services is

A) $40.
B) $55.
C) $65.
D) > $65.
Answer: B
Topic: Health Care
*: Recurring
36
24) Refer to Figure 5-3. The efficient quantity of medical services is
A) 400.
B) 800.
C) 1,200.
D) > 1,200.
Answer: B
Topic: Health Care
*: Recurring
25) Refer to Figure 5-3. With insurance and a third-party payer system, what is the amount of the
deadweight loss?
A) $0
B) $2,500
C) $5,000
D) $24,000
Answer: C
Topic: Health Care
*: Recurring
26) If an employee receives health insurance through his or her employer, the employer
A) still withholds contributions for Medicare and Medicaid from the employee's paycheck.
B) still withholds contributions for Medicare, but not Medicaid, from the employee's paycheck.
C) still withholds contributions for Medicaid, but not Medicare, from the employee's paycheck.
D) is no longer required to withhold contributions for Medicare or Medicaid from the employee's
paycheck.
Answer: A
Topic: Health Care
such intervention.
Special Feature: Chapter Opener: How Much Will You Pay for Health Insurance?
37
27) Which of the following is not part of the "individual mandate" provision of the Patient Protection
and Affordable Care Act (ACA)?
A) Individuals are allowed to opt out of the insurance program if they can prove they have no serious
health issues.
B) In 2016, fines for not having health insurance are the greater of $695 per person or 2.5 percent of
income.
C) Individuals who do not acquire health insurance will be subject to a fine.
D) With limited exceptions, every resident of the United States is required to have health insurance that
meets certain basic requirements.
Answer: A
Topic: Health Care
*: Recurring
such intervention.
28) The provision of the Patient Protection and Affordable Care Act (ACA) which states that, with
limited exceptions, every resident of the United States must have health insurance that meets certain
basic requirements is the ________ provision.
A) employer mandate
B) state health insurance marketplaces
C) individual mandate
D) regulation of health insurance
Answer: C
Topic: Health Care
*: Recurring
such intervention.
29) Which of the following is not part of the "state health insurance marketplaces" provision of the
Patient Protection and Affordable Care Act (ACA)?
A) Each state is required to establish an Affordable Insurance Exchange.
B) Small businesses with fewer than 50 employees are exempt from being required to participate in the
program.
C) Low-income individuals are eligible for tax credits to offset the costs of buying health insurance.
D) None of the above are a part of the "state health insurance marketplaces" provision.
Answer: B
Topic: Health Care
*: Recurring
such intervention.
38
30) The provision of the Patient Protection and Affordable Care Act (ACA) which states that every firm
with more than 200 full-time employees must offer health insurance to its employees and must
automatically enroll them in the plan is the ________ provision.
A) employer mandate
Answer: A
Topic: Health Care
*: Recurring
such intervention.
31) Which of the following is not part of the "regulation of health insurance" provision of the Patient
Protection and Affordable Care Act (ACA)?
A) Individuals with pre-existing medical conditions are able to acquire health insurance.
B) All policies must provide coverage for dependant children up to age 26.
C) Lifetime dollar maximums on coverage are prohibited.
D) Limits on the size of deductibles and on waiting periods before coverage takes effect have been
eliminated.
Answer: D
Topic: Health Care
*: Recurring
such intervention.
32) The provision of the Patient Protection and Affordable Care Act (ACA) which states that insurance
companies are required to participate in a high-risk pool that will insure individuals with pre-existing
medical conditions who have been unable to buy health insurance for at least six months is the ________
provision.
A) employer mandate
Answer: D
Topic: Health Care
*: Recurring
such intervention.
39
33) Which of the following is not part of the "taxes" provision of the Patient Protection and Affordable
Care Act (ACA)?
A) Pharmaceutical firms and health insurance firms pay new taxes.
B) Investors earning more than $200,000 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 pay higher Medicare payroll taxes.
Answer: C
Topic: Health Care
*: Recurring
such intervention.
34) The Congressional Budget Office estimates that the Patient Protection and Affordable Care Act
(ACA) will increase government spending
A) by about $2 trillion over 10 years.
B) by more than the additional taxes and fees enacted under the law will bring in.
C) by less than $50 billion over the next decade.
D) by more than $20 trillion dollars over the next 5 years.
Answer: A
Topic: Health Care
*: Recurring
such intervention.
35) The Patient Protection and Affordable Care Act (ACA) is scheduled ________, at which point more
than 30 million additional individuals are expected to have health care coverage.
A) to be phased in over the next 20 years
B) to be fully implemented by 2019
C) to be phased out by 2015
D) to be completely in place in 2016
Answer: B
Topic: Health Care
*: Recurring
such intervention.
40
36) Some economists and policymakers who are in favor of government-provided health care believe
that providing health care will
A) generate additional moral hazard.
B) create negative externalities.
C) reduce asymmetric information.
D) generate more adverse selection.
Answer: C
Topic: Externalities
*: Recurring
such intervention.
37) Economists who support market-based reforms for health care believe that increased competition
among providers of health care would
A) decrease costs but decrease economic efficiency.
B) decrease costs and increase economic efficiency.
C) increase costs but increase economic efficiency.
D) increase costs and decrease economic efficiency.
Answer: B
Topic: Health Care
*: Recurring
38) Lower deductibles for employer-provided health care will tend to shift the ________ curve for
medical services to the ________.
A) demand; left
B) demand; right
C) supply; left
D) supply; right
Answer: B
Diff: 2 Page Ref: 238-239/168-169
Topic: Health Care
Special Feature: Solved Problem: Recent Trends in Health Care
41
39) A decrease in the availability of lower-cost drugs will tend to shift the ________ curve for medical
services to the ________.
A) demand; left
B) demand; right
C) supply; left
D) supply; right
Answer: C
Diff: 2 Page Ref: 238-239/168-169
Topic: Health Care
Special Feature: Solved Problem: Recent Trends in Health Care
40) A goal of ________ is to give patients an incentive to pay more attention to the prices of medical
services. This would tend to increase economic efficiency by decreasing the costs of medical services.
A) the Patient Protection and Affordable Care Act (ACA)
B) market-based reforms of the health care system
C) government-provided health care
D) socialized medicine
Answer: B
Diff: 2 Page Ref: 241-242/171-172
Topic: Health Care
Special Feature: Making the Connection: How Much Is That MRI Scan?
41) Most employees ________ on the value of health insurance provided by employers, and most people
________ when buying individual health insurance policies.
A) pay taxes; get a tax break
B) pay taxes; do not get a tax break
C) do not pay taxes; get a tax break
D) do not pay taxes; do not get a tax break
Answer: D
Diff: 1 Page Ref: 242-243/172-173
Topic: Health Care
*: Recurring
42) About ________ of pharmaceutical patents are issued to U.S. firms.

A) 10 percent
B) one-half
C) two-thirds
D) 90 percent
Answer: C
Topic: Health Care
*: Recurring
42
43) About ________ of research on new medicines is carried out in the United States.
A) 10 percent
B) one-half
C) two-thirds
D) 90 percent
Answer: C
Topic: Health Care
*: Recurring
44) Economists John Cogan, Glenn Hubbard, and Daniel Kessler have estimated that ________ the tax
preference for employer-provided health insurance would reduce spending by people enrolled in these
programs by 33 percent.
A) enacting
B) doubling
C) cutting in half
D) repealing
Answer: D
Topic: Health Care
*: Recurring
45) The individual mandate provision of the ACA requires

A) every U.S. resident to have health insurance.
B) every U.S. company to provide health insurance to its employees.
C) every employed person to pay for his or her own health insurance.
D) every private insurance company to provide free health care to its current policy holders.
Answer: A
Topic: Health Care
*: Recurring
43
46) Replacing employment-based health care with a government-run system could reduce employers
payments for their workers insurance, but the amount that they would have to pay in overall
compensation
A) would remain essentially unchanged.
B) would dramatically increase.
C) would fall to zero.
D) would dramatically decrease.
Answer: A
Diff: 2 Page Ref: 234-235/164-465
Topic: Health Care
such intervention.
Special Feature: Making the Connection: Are U.S. Firms Handicapped by Paying for Their Employees' Health
Insurance?
Article Summary
The Center for Medicare and Medicaid Services (CMS) projects that between 2014 and 2022, over $2.7
trillion will be spent for private insurance overhead and administering government health programs,
including more than $270 billion in new administrative costs for the Affordable Care Act, which
averages to $1,375 per newly insured person every year, or almost one-quarter of the total federal
government expenditures for the program. Government programs account for over $100 billion of the
increase in overhead, and most of that will go to private Medicaid HMOs, which will account for 59
percent of total Medicaid administrative costs in 2022.
Source: David Himmelstein and Steffie Woolhandler, " The Post-Launch Problem: The Affordable
Care Act's Persistently High Administrative Costs," healthaffairs.org, May 27, 2015.
47) Refer to the Article Summary. The article discusses the rising administrative costs of health care.
Even if private insurance companies were more efficient and brought administrative costs down,
consumers would ________ the full cost of medical treatment. This would result in the market
equilibrium price and quantity of medical services being ________ than the efficient equilibrium price
and quantity.
A) pay less than; less than
B) pay more than; less than
C) pay more than; more than
D) pay less than; more than
Answer: A
Topic: Health Care
Special Feature: Making the Connection: The Post-Launch Problem: The Affordable Care Act's Persistently High
Administrative Costs
44
48) The rising cost of uninsured patients receiving treatment at hospital emergency rooms is one of the
leading causes of the increase in health care spending as a percentage of GDP in the United States.
Answer: FALSE
Topic: Health Care
*: Recurring
49) "Cost disease" refers to the tendency for high productivity in the service sector to lead to lower costs
in those industries.
Answer: FALSE
Topic: Health Care
*: Recurring
50) Under the Patient Protection and Affordable Care Act (ACA), individuals who do not have health
insurance will be subject to a fine.
Answer: TRUE
Topic: Health Care
*: Recurring
such intervention.
51) Under the Patient Protection and Affordable Care Act (ACA), every company with more than 200
employees must offer health insurance to its employees and must automatically enroll them in the plan.
Answer: TRUE
Topic: Health Care
*: Recurring
such intervention.
52) Those who favor changes in the market for health care that would make it more like the markets for
other goods and services favor what are generally known as market-based reforms.
Answer: TRUE
Topic: Health Care
*: Recurring
45
53) In most circumstances, employees pay taxes on the value of health insurance their employers
provide them.
Answer: FALSE
Topic: Health Care
*: Recurring
54) If consumers paid the full price of medical services instead of using health insurance and third-party
payers to cover part of the cost, the quantity of medical services provided would decrease.
Answer: TRUE
Topic: Health Care
*: Recurring
55) The Congressional Budget Office estimates that the additional taxes and fees enacted under the
ACA will not even cover half of the true cost of the ACA.
Answer: TRUE
Topic: Health Care
*: Recurring
56) In the United States, health care spending as a percentage of GDP has declined since 1965.
Answer: FALSE
Topic: Health Care
*: Recurring
57) As a percentage of GDP, health care spending on Medicare and Medicaid is expected to double over
the next 40 years unless health care costs begin to grow at a slower rate.
Answer: TRUE
Topic: Health Care
*: Recurring
46
58) In what ways do economists and policymakers who believe that the federal government should
have a larger role in the health care system criticize the Patient Protection and Affordable Care Act
(ACA)?
Answer: These people believe that information problems and externalities in the market for health care
are large enough that the government should provide health care with either government-owned
hospitals and government-employed doctors, or should pay for health care through national health
insurance. They basically believe that the ACA does not have enough government involvement, and
should be more like the systems in Canada, Japan, and Europe.
Topic: Health Care
*: Recurring
59) 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)?
Answer: These people believe that the market for health care should change so it is more like the
markets for other goods and services, where the prices consumers pay and that suppliers receive would
do a better job of conveying information on consumer demand and supplier costs. Increased
competition in the market for health care services would reduce costs and increase economic efficiency.
Those in favor of market-based reforms criticize the ACA for not adopting this approach.
Topic: Health Care
*: Recurring
60) What are two reasons why employees would prefer for their employer to pay for their health
insurance rather than receiving increased wages and paying for their own health insurance?
Answer:
1. The wage an employer pays employees is taxable income to the employees but the money an
employer spends to buy health insurance for employees is not taxable.
2. Insurance companies are typically willing to charge lower premiums for group insurance,
particularly to large employers, because risk pooling is improved and adverse selection and moral
hazard problems are lower when compared with individual policies.
Topic: Health Care
Special Feature: Economics in Your Life: Is Your Take-Home Pay Affected by What Your Employer Spends on Your
Health Insurance?
47
Figure 5-4
Figure 5-4 represents the supply and demand for medical services with and without a third-party payer.
61) Refer to Figure 5-4. Answer the following questions:

1. What would be the equilibrium price and quantity if consumers had to pay the full price of medical
services?
2. With insurance acting as a third-party payer, what price will consumers pay for medical service?
3. With insurance acting as a third-party payer, what price will doctors receive for medical service?
4. With insurance acting as a third-party payer, what will be the equilibrium quantity of medical
services?
5. With insurance acting as a third-party payer, what will be the value of the deadweight loss?
Answer:
1.$50; 400
2. $25
3. $70
4. 600
5. $4,500
Topic: Health Care
*: Recurring
48

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Solution Manual for Macroeconomics 6th Edition Hubbard

O Brien 0134106229 9780134106229

Solution manual: https://testbankpack.com/p/solution-manual-for-macroeconomics-6th-edition-

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Macroeconomics 2017 (Hubbard)

5.1 The Improving Health of People in the United States

3) On average, people in low-income countries ________ than people in high-income countries.

16) How can increases in a country's total income improve health?

4) In 2014, ________ of the uninsured were younger than age 35.

32) What is health insurance?

1) In the market for insurance,

8) The principal-agent problem is a problem

9) In the principal-agent relationship, the principal is

12) Adverse selection will occur in a market as a result of

13) Which of the following is an example of adverse selection?

32) Refer to Figure 5-1. The efficient equilibrium price is

35) Refer to Figure 5-1. At the market equilibrium,

48) Vaccinations tend to result in a negative externality.

50) What is asymmetric information?

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

5) In 1960, out-of-pocket spending on health care in the United States was

23) Refer to Figure 5-3. The efficient price of medical services is

42) About ________ of pharmaceutical patents are issued to U.S. firms.

45) The individual mandate provision of the ACA requires

61) Refer to Figure 5-4. Answer the following questions:

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