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Economics 2017 (Hubbard/O'Brien)
Chapter 7 The Economics of Health Care
7.1 The Improving Health of People in the United States
1) Over the past 160 years in the United States, life expectancy
A) has remained fairly constant.
B) has slightly declined.
C) has more than doubled.
D) increased up to the 1950s and then declined for the next 60 years.
Answer: C
Diff: 1 Page Ref: 218
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) Health care makes up ________ of the U.S. economy.

A) about 2 percent
B) roughly 8 percent
C) more than one-sixth
D) almost two-thirds
Answer: C
*: Recurring
3) On average, people in high-income countries ________ than people in low-income countries.

A) have a shorter life expectancy
B) are subject to a higher infant mortality rate
C) are taller
D) are exposed to more severe diseases
Answer: C
*: Recurring
AACSB: Analytical thinking
1
Copyright © 2017 Pearson Education, Inc.
4) In the United States, doctors and hospitals that provide most health care are
A) primarily private firms.
B) primarily employed by the government.
C) split evenly between private firms and employed by the government.
D) 100 percent employed by the government.
Answer: A
*: Recurring
5) Between 1981 and 2013, the overall mortality rate in the United States
A) decreased by more than 25 percent.
B) slowly but steadily increased.
C) remained fairly constant.
D) was similar to the average rate in most low-income countries.
Answer: A
*: Recurring
6) A typical consumer of health care in the United States

A) pays the full price of his or her health care.
B) pays more than the full price of his or her health care.
C) does not pay any of the price of his or her health care.
D) does not pay the full price of his or her health care.
Answer: D
*: Recurring
2
7) In the United States from 1981 to 2013, deaths from all of the following declined substantially
except
A) cancer.
B) kidney disease.
C) heart attacks.
D) strokes.
Answer: B
*: Recurring
8) In the United States from 1981 to 2013, deaths from diabetes increased largely due to the
effects of
A) foreign-produced insulin.
B) stress in the workplace.
C) a larger immigrant population.
D) increasing obesity.
Answer: D
*: Recurring
9) The overall decline in death rates in the United States since 1981 was due to all of the
following except
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
3
10) Better health allows people to work harder, which raises a country's total income. This
indicates that in effect, better health
A) is a primary cause of price increases.
B) reduces the incentive to work.
C) shifts out a country's production possibilities frontier.
D) increases consumer surplus.
Answer: C
*: Recurring
Learning Outcome: Micro-19: Explain the concept of efficiency in the economy and obstacles to
achieving it
11) 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
*: Recurring
12) 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
4
13) 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
14) 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
15) 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
5
16) 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
17) 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
18) In the United States from 1981 to 2013, deaths from ________ increased largely due to the
effects of increasing obesity.
A) strokes
B) cancer
C) heart attacks
D) diabetes
Answer: D
*: Recurring
6
19) 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
20) 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
achieving it
21) Changes in the health of the average person are an important indicator of changes in the
standard of living.
Answer: TRUE
*: Recurring
achieving it
22) The overall mortality rate in the United States has remained fairly constant for the past 30
years.
Answer: FALSE
*: Recurring
7
23) Life expectancy at birth in the United States has more than doubled since 1850.
Answer: TRUE
*: Recurring
24) Between 1981 and 2013, deaths from cancer have increased in the United States.
Answer: FALSE
*: Recurring
25) Changes in the health of the average person are relatively unimportant as an indicator of
changes in the standard of living.
Answer: FALSE
*: Recurring
achieving it
26) Since 1981, deaths from cardiovascular diseases have decreased in the United States.
Answer: TRUE
*: Recurring
achieving it
27) The overall mortality rate in the United States has declined for the past 30 years.
Answer: TRUE
*: Recurring
8
28) 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
29) How can changes over time of the average height of the people in a country help to indicate
the standard of living in a country?
Answer: A person's height partly relies on nutritional status, which depends on a person's food
intake relative to the work the person has to perform, whether the person is able to remain warm
in cold weather, and the diseases to which the person is exposed. Height, then, can be used as a
measure of health and well-being, and therefore a measure of the standard of living.
*: Recurring
achieving it
30) How can improvements in health increase a country's total income?

Answer: Improvements in health make it possible for people to work harder as they become
taller, stronger, and more resistant to disease. Working harder makes a country more productive
and raises its total income.
*: Recurring
achieving it
9
31) Briefly describe the most important differences between the market for health care and the
market for other goods and services.
Answer: Doctors and hospitals that supply most health care are primarily private firms, as is true
in the market for other goods and services, but with health care, the government also provides
some services directly through the Veterans Health Administration, and indirectly through
Medicare and Medicaid. In the market for other goods and services, consumers pay the full
market price, but in the market for health care, a typical consumer does not pay the full price
because of health insurance.
*: Recurring
achieving it
32) 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
achieving it
33) 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
achieving it
10
34) 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
achieving it
7.2 Health Care around the World
1) In the United States in 2014, the percentage of people with private health insurance was about
A) 17%.
B) 29%.
C) 74%.
D) 83%.
Answer: C
Topic: Health Care Around the World
*: Recurring
2) In the United States in 2014, the percentage of people without any form of health insurance
was about
A) 10%.
B) 29%.
C) 64%.
D) 83%.
Answer: A
*: Recurring
11
3) In the United States in 2014, the percentage of people who received health insurance through
a government program was about
A) 10%.
B) 16%.
C) 36%.
D) 64%.
Answer: C
*: Recurring
4) In the United States in 2014, the percentage of firms that employed more than 200 workers
and offered health insurance as a fringe benefit to the workers was about
A) 29%.
B) 42%.
C) 61%.
D) 98%.
Answer: D
*: Recurring
5) In the United States in 2014, the percentage of firms that employed between 3 and 199
workers and offered health insurance as a fringe benefit to the workers was about
A) 29%.
B) 42%.
C) 54%.
D) 98%.
Answer: C
*: Recurring
12
6) In the United States in 2014, the percentage of people that directly purchased an individual or
family health insurance policy from an insurance company was about
A) 2%.
B) 15%.
C) 17%.
D) 26%.
Answer: B
*: Recurring
7) A contract under which a buyer agrees to make payments in exchange for the provider
agreeing to pay some or all of the buyer's medical bills is referred to as
A) a fee-for-service plan.
B) the Affordable Care Act.
C) a deductible.
D) health insurance.
Answer: D
*: Recurring
8) In the United States, private health insurance companies

A) are all for-profit firms.
B) are all not-for-profit firms.
C) can be either for-profit or not-for-profit firms.
D) are all government-run firms.
Answer: C
*: Recurring
13
9) In the United States in 2014, about seventy percent of those who were not covered by health
insurance
A) are single and unemployed.
B) live in families in which at least one member has a job.
C) live in families in which all members are unemployed.
D) are retired from the workforce.
Answer: B
*: Recurring
10) In the United States in 2014, of those companies employing more than 200 workers that offer
health care to those workers, ________ of employees accept the coverage.
A) about 10 percent
B) roughly 36 percent
C) fewer than two-thirds
D) almost 98 percent
Answer: C
*: Recurring
11) Health insurance plans which typically reimburse doctors mainly by paying a flat fee per
patient are known as
A) fee-for-service plans.
B) preferred provider organizations.
C) single-health-payer systems.
D) health maintenance organizations.
Answer: D
*: Recurring
14
12) The health care system in Canada is referred to as ________, and is a system in which the
government provides national health insurance to all Canadian residents.
A) an out-of-pocket system
B) a single-payer health care system
C) a universal health insurance system
D) socialized medicine
Answer: B
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain
the consequences of such intervention
13) The health care system in Japan is referred to as ________, under which every resident of
Japan is required to enroll in either a private, or the government-provided, health insurance
program.
Answer: C
*: Recurring
14) The health care system in the United Kingdom is referred to as ________, under which the
government owns most of the hospitals and employs most of the doctors.
Answer: D
*: Recurring
15
15) Most doctors and hospitals operate as private businesses in all of the following countries
except
A) Canada.
B) Japan.
C) the United Kingdom.
D) the United States.
Answer: C
*: Recurring
16) Health insurance typically pays for most preventive care procedures in all of the following
countries except
A) Canada.
B) Japan.
Answer: B
*: Recurring
17) In which of the following countries are substantial co-payments typically required as a part
of the health care system?
A) Canada and the United States
B) Japan and Canada.
C) the United States and Japan
D) the United States and the United Kingdom
Answer: C
*: Recurring
16
18) The largest government-run health care system in the world, with 1.7 million employees, is
in
A) Canada.
B) Japan.
Answer: C
*: Recurring
Learning Outcome: Micro-23: Discuss the economics of public goods and common resources
19) Typically, the higher the level of income per person in a country, the higher 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
Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
20) In the United States, health care spending per person based on income per person is
________ the average for most other countries.
A) slightly lower than
B) significantly higher than
C) significantly lower than
D) comparable to
Answer: B
*: Recurring
Learning Outcome: Micro-11: Explain how to measure consumer preferences and discuss the
major theories about consumer choice
17
21) Of the following high-income countries, which has the lowest life expectancy at birth?
A) Canada
B) Japan
C) the United Kingdom
D) the United States
Answer: D
Diff: 1 Page Ref: 224-225
*: Recurring
22) Of the following high-income countries, which has the highest infant mortality rate?
A) Canada
B) Japan
Answer: D
*: Recurring
23) Of the following high-income countries, which has the lowest mortality ratio for cancer?
A) Canada
B) Japan
Answer: D
*: Recurring
18
24) Of the following high-income countries, which has the highest number of CT scanners per 1
million population?
A) Canada
B) Japan
Answer: B
*: Recurring
25) Of the following high-income countries, which has the lowest number of MRI units per 1
million population?
A) Canada
B) Japan
Answer: C
*: Recurring
26) The U.S. Bureau of Labor Statistics forecasts that ________ fastest-growing occupations
over the next 10 years will be in health care.
A) over 95 percent of the
B) less than 2 of the 10
C) 13 of the 20
D) just under half of the
Answer: C
Special Feature: Making the Connection: The Increasing Importance of Health Care in the U.S.
Economy
19
27) 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
*: Recurring
28) 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
29) 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
20
30) 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
31) 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
32) 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
21
33) 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
34) 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
35) 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
22
36) 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
Answer: A
*: Recurring
37) 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
38) 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
23
39) Most doctors are employed by the government and most hospitals are owned by the
government in
A) Canada.
B) Japan.
Answer: C
*: Recurring
40) In which of the following countries does health insurance not pay for most preventive care
procedures?
A) Canada
B) Japan
Answer: B
*: Recurring
41) 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
24
42) 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
43) 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
44) 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
25
45) 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
46) Of the following high-income countries, which has the highest life expectancy at birth?
A) Canada
B) Japan
Answer: B
*: Recurring
47) Of the following high-income countries, which has the lowest infant mortality rate?
A) Canada
B) Japan
Answer: B
*: Recurring
26
48) Of the following high-income countries, which has the highest mortality ratio for cancer?
A) Canada
B) Japan
Answer: B
*: Recurring
49) Of the following high-income countries, which has the highest obesity rate?
A) Canada
B) Japan
Answer: D
*: Recurring
50) Of the following high-income countries, which has the highest male life expectancy at age
65?
A) Canada
B) Japan
Answer: B
*: Recurring
27
51) Of the following high-income countries, which has the highest female life expectancy at age
65?
A) Canada
B) Japan
Answer: B
*: Recurring
52) 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
53) A majority of people in the United States have private health insurance.
Answer: TRUE
*: Recurring
54) In the United States in 2014, over 90 percent of people without health insurance were below
the age of 35.
Answer: FALSE
*: Recurring
28
55) On average, people in the United States spend a greater percentage of their income on health
care than do people in most other countries.
Answer: TRUE
*: Recurring
56) Canada has a single-payer health care system in which the government provides national
health insurance to all Canadian residents.
Answer: TRUE
*: Recurring
57) The Japanese system of universal health insurance requires no co-payments from residents
for health services.
Answer: FALSE
*: Recurring
58) A majority of people in the United States do not have private health insurance.
Answer: FALSE
*: Recurring
59) Although most large firms in the United States offer their employees health insurance, fewer
than two-thirds accept it.
Answer: TRUE
*: Recurring
29
60) 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
61) 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
62) Japan has a single-payer health care system in which the government provides national
health insurance to all Japanese residents.
Answer: FALSE
*: Recurring
63) What are the main sources of health insurance in the United States?
Answer: The percentage of Americans covered by various types of health insurance are as
follows:
Employer provided insurance: 64%.
Medicaid, VA, and Medicare: 36%.
Individual private insurance: 10%.
[Uninsured: 16%.]
*: Recurring
30
64) Identify and explain 4 of the difficulties in making cross-country comparisons in health care
outcomes.
Answer: Data problems: Countries do not always collect data on diseases and other health
problems in the same way, so consistency problems can arise.
Problems with measuring health care delivery: Outcomes of many medical activities can be
difficult to measure.
Problems with distinguishing health care effectiveness from lifestyle choices: Health care
outcomes depend not only on the effectiveness of doctors and hospitals in delivering medical
services, but also on individual's choices.
Problems with determining consumer preferences: In the market for health care, governments
play a dominant role in supplying the service in most countries, so the cost of the service is not
fully reflected in its price.
*: Recurring
65) What is the main difference between a single-payer health care system and socialized
medicine?
Answer: A single-payer health care system, such as the one in Canada, is one in which the
government provides health insurance to all of the country's residents. Socialized medicine, such
as the system in the United Kingdom, is a system in which the government owns most of the
hospitals and employs most of the doctors.
*: Recurring
66) 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
31
67) 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
68) 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
7.3 Information Problems and Externalities in the Market for Health Care
1) A key difficulty facing insurance companies is that people know more about their health than
do insurance companies, and that those people who are seriously ill are the most likely to want to
obtain health insurance. What is this phenomenon called?
A) moral hazard
B) economic irrationality
C) asymmetric information
D) adverse selection
Answer: C
Topic: Asymmetric Information
*: Recurring
Learning Outcome: Micro-21: Describe methods for countering and avoiding risk
32
2) An insurance company is likely to attract customers like Clancy who want to purchase
insurance because he knows better that the company that he is more likely to make a claim on a
policy. What is the term used to describe the situation above?
A) moral hazard
B) adverse selection
C) asymmetric information
D) economic irrationality
Answer: B
Topic: Adverse Selection
*: Recurring
3) The term that is used to refer to a situation in which one party to an economic transaction has
less information than the other party is
A) inefficient market hypothesis.
B) moral hazard.
C) information disparity.
D) asymmetric information.
Answer: D
*: Recurring
4) Which of the following parties is likely to have the most information about the health of an
individual who is trying to purchase a health insurance policy?
A) the company that issues the health insurance policy
B) the individual who is applying for the health insurance policy
C) the employer of the individual who is trying to purchase the health insurance policy
D) All parties in the health insurance market have access to the same level of information.
Answer: B
*: Recurring
33
5) What is adverse selection?
A) It refers to the private, self-interested actions people that people pursue, which when taken
collectively leads to a loss in economic surplus.
B) It refers to the actions people take after they have entered into a transaction that make the
other party to the transaction worse off.
C) It refers to the situation in which one party to a transaction takes advantage of knowing more
than the other party to the transaction.
D) It refers to the actions people take before they enter into a transaction so as to mislead the
other party to the transaction.
Answer: C
*: Recurring
6) Consider a used car market in which half the cars are good and half are bad (lemons). A
rational buyer in this market should
A) offer to pay a price equal to the most she would pay for a good car.
B) offer to pay a price equal to the most she would pay for a lemon.
C) offer to pay a price somewhere between the price she would pay for a good car and the price
she would pay for a lemon.
D) save up and buy a new car.
Answer: C
Topic: The Market for Lemons
*: Recurring
7) Consider a used car market in which half the cars are good and half are bad (lemons). If
buyers are rational, the prices being offered for used cars will result in
A) an equal proportion of a good cars and lemons being sold in an efficient market.
B) a larger proportion of good cars being sold and consequently, consumer surplus is increased.
C) a larger proportion of lemons being sold and consequently, producer surplus is increased.
D) an equal proportion of good cars and lemons being sold in an inefficient market.
Answer: C
*: Recurring
34
8) Consider a used car market in which half the cars are good and half are bad (lemons). Suppose
the average price of a good car is $9,000 and the average price of a lemon is $3,000. If rational
buyers are willing to pay $6,000 for a used car, then sellers will agree to sell mostly lemons at
this price. What is the term used to describe this situation?
A) moral hazard
B) adverse selection
C) an efficient market
D) economic irrationality
Answer: B
*: Recurring
9) 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) 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 $3,000.
Answer: A
*: Recurring
10) Adverse selection occurs in the market for used cars because used car buyers
A) have more information than used car sellers.
B) have less information than used car sellers.
C) have less incentive to maintain the value of their cars than new car buyers.
D) tend to have more accidents than new car buyers.
Answer: B
*: Recurring
35
11) If a buyer in an economic transaction has more information than the seller, the buyer benefits
at the expense of the seller. This phenomenon is due to
A) moral hazard.
B) adverse selection.
C) economically irrational behavior.
D) gains from trade.
Answer: B
*: Recurring
12) If a state requires all drivers to purchase auto insurance, insurance companies still face the
problem of
A) correctly pricing their insurance.
B) sunk costs.
C) adverse selection.
D) excess demand for their insurance.
Answer: A
*: Recurring
13) Which of the following is not an advantage of risk pooling?

A) By insuring large groups as opposed to individuals, health insurance providers reduce adverse
selection.
B) It gives very sick people in the group the same access to health care and to pay the same
premiums as healthy individuals.
C) It is easier for an insurance company to estimate the average number of claims likely to be
filed under a group policy than it is to predict the number of claims likely to be filed under an
individual policy.
D) Individuals who are insured and therefore do not have to pay the full cost of health care
services may be inclined to over-use those services.
Answer: D
*: Recurring
36
14) 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 eliminates ________ for both the insurer and the insured, and
eliminates ________ for the issuer of the insurance policy.
A) the principal-agent problem; moral hazard
B) asymmetric information; adverse selection
C) adverse selection; the principal-agent problem
D) moral hazard; adverse selection
Answer: B
*: Recurring
15) When people who buy insurance change their behavior after the purchase because they are
protected from loss by the insurance, the insurance market is said to face the problem of
A) moral hazard.
C) asymmetric information.
D) economic irrationality.
Answer: A
Topic: Moral Hazard
*: Recurring
16) Which of the following individuals is most likely to purchase a life insurance policy that
pays out an annual income beginning at a certain age until the individual's death?
A) Ian, who expects to have a short life expectancy because of an illness
B) Bradley who has six young children
C) Avril, a tax attorney who wants to avoid adverse selection
D) Alma, who expects to live a long life, based on her family history
Answer: D
*: Recurring
37
17) One reason why adverse selection problems arise in health insurance markets is that
A) sick people are more likely to want health insurance than healthy people.
B) because of advances in medical technology, people are living longer. These medical advances
are costly and drive up the price of insurance for everyone.
C) the average age of citizens of the United States has increased in recent years, and will
continue to increase over the next 20 to 30 years. As older citizens retire, more and more of their
medical bills will have to be paid by younger workers.
D) fewer men and women are choosing medical careers because of the increase in the cost of
malpractice insurance.
Answer: A
*: Recurring
18) The cost of group health insurance is lower than if an individual buys a policy on his own
because
A) the problem of adverse selection is reduced.
B) moral hazard costs of a group tend to move to a low average.
C) it is easier for the company to deny claims from a large group.
D) insuring a group eliminates the problem of buyers having more information than the seller.
Answer: A
*: Recurring
19) Which of the following is not an advantage to an insurance company of insuring a large
group of people for health insurance?
A) The characteristics of a large group are likely to reflect those of the entire population.
B) It is easier to accurately predict the number of claims for a group than for an individual.
C) When all group members pay the premium, the problem of moral hazard is reduced.
D) When all group members pay the premium, the problem of adverse selection is reduced.
Answer: C
*: Recurring
38
20) What is moral hazard?
A) It refers to the private, self-interested actions that people pursue, which when taken
collectively leads to a loss in economic surplus.
B) It refers to the actions people take after they have entered into a transaction that makes the
other party to the transaction worse off.
C) It refers to the situation in which one party to a transaction takes advantage of knowing more
than the other party to the transaction.
D) It refers to the actions people take before they enter into a transaction so as to mislead the
other party to the transaction.
Answer: B
Topic: Moral Hazard
*: Recurring
21) Automobile insurance companies have a problem with people who buy insurance and then
drive recklessly or take less care to avoid losses after being insured. In other words, the
automobile insurance market is subject to
A) asymmetric information.
B) market signaling.
C) moral hazard.
D) adverse selection.
Answer: C
Topic: Moral Hazard
*: Recurring
22) If a fire insurance company requires firms buying fire insurance to install automatic sprinkler
systems, the insurance company is trying to reduce
A) the problem of adverse selection.
B) the moral hazard problem.
C) sunk costs.
Answer: B
Topic: Moral Hazard
*: Recurring
39
23) Health insurance companies impose deductibles on policies and co-payments on claims
A) to increase sales.
B) to reduce moral hazard problems.
C) to reduces sunk costs.
D) to increase prices.
Answer: B
Topic: Moral Hazard
*: Recurring
24) In markets with asymmetric information

A) moral hazard causes adverse selection which in turn causes asymmetric information.
B) adverse selection causes moral hazard which in turn causes asymmetric information.
C) asymmetric information causes moral hazard and then it causes adverse selection.
D) asymmetric information causes adverse selection and then it causes moral hazard.
Answer: D
Topic: Adverse Selection and Moral Hazard
Special Feature: Don't Let This Happen to You: Don't Confuse Adverse Selection with Moral
Hazard
25) What is the principal-agent problem?

A) It is a problem 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) It is a problem caused by agents pursuing their own interests rather than the interests of the
principals who hired them.
C) It is a problem of the power system of boss and subordinate where the boss (principal) exerts
influence over his subordinates (agents) using punishment or threat.
D) It is a problem that exists when a person (principal) has more information about the task than
the agent he hires to perform the task.
Answer: B
Topic: Principal-Agent Problem
*: Recurring
40
26) In the principal-agent relationship, the agent is
A) the owner of a resource that has hired another party to act on his behalf.
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: B
*: Recurring
27) If a doctor knows that an insurance company will pay for most of a patient's bill, the doctor
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.
Answer: B
*: Recurring
41
28) Suppose a large firm allows its employees to choose whether to participate in its health
insurance plan. The firm is trying to decide between two plans: Plan I has a low monthly
premium but a high deductible, and Plan II has a high monthly premium but a low deductible.
Under which plan is adverse selection likely to be a bigger problem?
A) Plan I because it is likely to draw participants who expect high medical costs. This group
expects to consume much health care services and therefore prefer low deductibles.
B) Plan II because it is likely to draw participants who expect high medical costs. Healthy
individuals who do not expect to consume much health care services will not be willing to pay
the high premiums.
C) Plan I because it is likely to draw the relatively healthy employees who do not expect to spend
much on health care. Because the monthly premiums are low, the insurance company has to bear
a bigger financial burden in the event of serious illnesses.
D) Plan II because it is likely to draw employees who tend to over-consume health care services
because of the low deductible. Insurance companies are likely to end up paying out more claims
than the premiums they collect.
Answer: B
*: Recurring
42
Figure 7-1
Figure 7-1 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.
29) Refer to Figure 7-1. 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
Topic: Positive Externality
*: Recurring
30) Refer to Figure 7-1. 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
43
31) Refer to Figure 7-1. The market equilibrium price is
A) $30.
B) $25.
C) $20.
D) <$20.
Answer: C
*: Recurring
32) Refer to Figure 7-1. The market equilibrium quantity is ________ thousand vaccinations.
A) 100
B) 200
C) 300
D) >300
Answer: B
*: Recurring
33) Refer to Figure 7-1. The efficient equilibrium price is

A) $30.
B) $25.
C) $20.
D) <$20.
Answer: B
*: Recurring
34) Refer to Figure 7-1. The efficient equilibrium quantity is ________ thousand vaccinations.
A) 100
B) 200
C) 300
D) >300
Answer: C
*: Recurring
44
35) Refer to Figure 7-1. 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
36) Refer to Figure 7-1. At the market equilibrium

A) the marginal benefit is equal to the marginal cost.
B) the marginal benefit is greater than the marginal cost.
C) the marginal benefit is less than the marginal cost.
D) the marginal benefit is zero.
Answer: B
*: Recurring
37) Refer to Figure 7-1. At the market equilibrium, the deadweight loss is equal to
A) $0.
B) $250,000.
C) $500,000.
D) $1,000,000.
Answer: C
*: Recurring
38) Because of the positive externality of vaccinations, economic efficiency would be improved
A) if fewer people were vaccinated.
B) if more people were vaccinated.
C) only if all people were vaccinated.
D) only if no people were vaccinated.
Answer: B
*: Recurring
45
39) Vaccinating people against a communicable disease such as influenza not only reduces the
chances that the person vaccinated will catch the disease but also reduces the probability that an
epidemic of the disease will occur. Which of the following statements is true?
A) Reducing the chances that the person vaccinated will catch the disease is a private cost while
reducing the probability of an influenza epidemic is a social benefit.
B) Vaccinating people against communicable diseases yields private benefits in excess of social
benefits.
C) Reducing the chances that the person vaccinated will catch the disease is a private benefit
while reducing the probability of an influenza epidemic is a social benefit.
D) The benefits of the influenza vaccination outweigh the costs.
Answer: C
Topic: Health Care
40) In the United States, the bulk of health care spending is paid by health insurance companies.
Such a system is also called a third-party payer system where consumers of health care pay a
nominal fee and the rest are paid by the health insurance provider. Why might such a system lead
to an inefficient outcome?
A) Health insurance companies have an incentive to control cost and therefore tend to deny
consumers many cutting edge medical treatments.
B) Consumers have an incentive to over-consume health care services because they pay prices
well below the cost of providing these services.
C) Physicians concerned that insurance companies may not approve payments tend not to order
expensive tests for their patients.
D) Consumers fearing that excessive use of health care services may lead to a rise in insurance
premiums tend to under-consume health care services.
Answer: B
Topic: Health Care
46
41) How do current tax laws in the United States favor employer-based health care insurance?
A) Individuals who receive health insurance benefits are allowed to deduct the value of these
benefits from their taxable income.
B) Employers who provide health insurance benefits are reimbursed by the government and are
not taxed on these reimbursements.
C) Individuals who receive health insurance benefits do not pay taxes on the value of these
benefits.
D) Health insurance companies that provide insurance to employers are subject to a lower tax
rate than those insurance companies that provide insurance to private individuals.
Answer: C
Topic: Health Care
42) 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
*: Recurring
43) 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
47
44) Pricing insurance policies is made difficult because buyers have more information than
sellers. This difficulty is an example of
A) moral hazard.
D) the free-rider problem.
Answer: C
*: Recurring
45) 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
46) 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
48
47) 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
48) 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.
Answer: B
*: Recurring
49) 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
49
50) 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
51) 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
52) 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
50
53) 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
*: Recurring
54) 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
55) 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
*: Recurring
51
56) 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.
Answer: D
*: Recurring
$1,500 each. Buyers cannot tell if a used car is reliable or is a lemon. Based on this information,
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
58) 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
52
59) 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
60) 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.
Answer: B
Topic: Moral Hazard
*: Recurring
61) 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
Hazard
53
62) 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
Hazard
63) 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
Hazard
54
64) ________ 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
65) ________ 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
$800 each. Buyers cannot tell if a used car is reliable or is a lemon. Based on this information,
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
55
67) 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.
C) market signaling.
Answer: B
*: Recurring
68) 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
*: Recurring
56
Figure 7-2
Figure 7-2 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.
69) Refer to Figure 7-2. 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
57
70) Refer to Figure 7-2. 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
71) Refer to Figure 7-2. The market equilibrium price is

A) $60.
B) $50.
C) $40.
D) < $40.
Answer: C
*: Recurring
72) Refer to Figure 7-2. The market equilibrium quantity is ________ thousand vaccinations.
A) 200
B) 400
C) 600
D) > 600
Answer: B
*: Recurring
73) Refer to Figure 7-2. The efficient equilibrium price is

A) $60.
B) $50.
C) $40.
D) < $40.
Answer: B
*: Recurring
58
74) Refer to Figure 7-2. The efficient equilibrium quantity is ________ thousand vaccinations.
A) 200
B) 400
C) 600
D) > 600
Answer: C
*: Recurring
75) Refer to Figure 7-2. 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
76) Refer to Figure 7-2. 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
59
77) Refer to Figure 7-2. 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
78) 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
79) 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
60
80) One effect of adverse selection in a market is that the equilibrium quantity of the product
may
be smaller than it would have been if there were no asymmetric information problems.
Answer: TRUE
*: Recurring
81) Due to adverse selection, very few lemons will be sold in the market for used cars.
Answer: FALSE
*: Recurring
82) The situation in which one party to a transaction takes advantage of knowing more than the
other party to the transaction is known as asymmetric information.
Answer: FALSE
*: Recurring
83) If a state requires all drivers to buy auto insurance, the problem of adverse selection is
eliminated.
Answer: TRUE
*: Recurring
84) Adverse selection is a situation in which one party to a transaction takes advantage of
knowing more than the other party to the transaction.
Answer: TRUE
*: Recurring
61
85) A doctor pursuing his own interests rather than the interests of his patients is an example of
the principal-agent problem.
Answer: TRUE
*: Recurring
86) Moral hazard refers to the actions people take after they have entered into a transaction that
make the other party to the transaction worse off.
Answer: TRUE
Topic: Moral Hazard
*: Recurring
87) Vaccinations tend to result in a positive externality.

Answer: TRUE
*: Recurring
88) College education tends to result in a negative externality because the recipient does not
receive the full benefit of the education.
Answer: FALSE
*: Recurring
89) In a market with positive externalities, the market equilibrium price will be less than the
efficient equilibrium price.
Answer: TRUE
*: Recurring
62
90) Health insurance companies impose deductibles on policies and co-payments on claims to
reduce the problem of adverse selection.
Answer: FALSE
Topic: Moral Hazard
*: Recurring
91) Adverse selection is a situation in which one party to an economic transaction has less
information than the other party.
Answer: FALSE
*: Recurring
92) One consequence of adverse selection in the market for used cars is that most used cars sold
will be lemons.
Answer: TRUE
*: Recurring
93) Insurance companies use deductibles and coinsurance to reduce moral hazard.
Answer: TRUE
Topic: Moral Hazard
*: Recurring
94) 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
63
95) 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
96) A doctor pursuing the interests of his patients rather than his own interests is an example of
the principal-agent problem.
Answer: FALSE
*: Recurring
97) 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
98) In a market with positive externalities, the market equilibrium price will be greater than the
efficient equilibrium price.
Answer: FALSE
*: Recurring
99) In a market with positive externalities, the market equilibrium quantity will be less than the
efficient equilibrium quantity.
Answer: TRUE
*: Recurring
64
100) Vaccinations tend to result in a negative externality.
Answer: FALSE
*: Recurring
101) College education tends to result in a positive externality because the recipient receives the
full benefit of the education.
Answer: FALSE
*: Recurring
102) What is adverse selection?

Answer: Adverse selection refers to a situation where one party to a transaction takes advantage
of the fact that she has more information than the other party to the transaction.
*: Recurring
103) What is the principal-agent problem?

Answer: The principal-agent problem is a problem caused by agents pursuing their own interests
rather than the interests of the principals who hired them.
*: Recurring
65
104) Suppose you see a 2006 Scion xB Sport Wagon advertised in the local newspaper for
$8,500. If you knew the car was reliable, you would be willing to pay $10,000 for it. If you knew
the car was unreliable, you would only be willing to pay $5,500 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
105) What is moral hazard?

Answer: Moral hazard is a tendency for people to act in risky and reckless ways if they know
that others will bear the burden of most or all of any bad consequences.
Topic: Moral Hazard
*: Recurring
106) Why might a young, healthy person choose not to buy health insurance?
Answer: if you are healthy and rarely visit the doctor or buy prescription medicines, you are
likely to pay more in premiums than you receive back in benefits.
107) What is an externality? Explain how someone receiving a meningitis vaccination is an

example of an externality in the market for health care.
Answer: An externality is a benefit or cost that affects someone who is not directly involved in
the production or consumption of a good or service. Someone who receives a meningitis
vaccination is protecting not just himself or herself from the disease, but also reduces the chances
that people who have not been vaccinated will contract the disease. In this case, receiving the
vaccination provides a positive externality.
Topic: Externalities
*: Recurring
Learning Outcome: Micro-22: Explain how externalities affect market efficiency
66
108) Vaccinations tend to result in a positive externality. Draw a graph showing the market for
vaccinations, including both the marginal private benefit curve and the marginal social benefit
curve. Identify the market equilibrium price and quantity, the efficient equilibrium price and
quantity, and the deadweight loss.
Answer:

*: Recurring
Learning Outcome: Micro-22: Explain how externalities affect market efficiency
109) What is asymmetric information?

Answer: Asymmetric information occurs when one party to an economic transaction has less
information than the other party.
*: Recurring
67
110) 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
111) 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
112) 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
68
Figure 7-3
Figure 7-3 shows the effect of a positive externality on the market for vaccinations.
113) Refer to Figure 7-3. 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
7.4 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
A) had returned to its 1995 level.
B) had declined to only 6.5 percent.
C) was almost than three times as high as it was in 1965.
D) reached a level of 75 percent.
Answer: C
Topic: Health Care
*: Recurring
achieving it
69
2) In the United States, total health care spending per person has been ________, and out-of-
pocket spending on health care per person has been ________.
A) rising; rising
B) rising; falling
C) falling; rising
D) falling; falling
Answer: B
Topic: Health Care
*: Recurring
achieving it
3) Compared to other high-income countries, health care spending per person in the United
States has been
A) growing at a faster rate.
B) declining at a faster rate.
C) growing at approximately the same rate.
D) declining at approximately the same rate.
Answer: A
Topic: Health Care
*: Recurring
achieving it
4) In the United States, out-of-pocket spending on health care as a percentage of all spending on
health care has ________ since 1960.
A) slowly risen
B) steadily declined
C) more than doubled
D) remained stable
Answer: B
Topic: Health Care
*: Recurring
achieving it
70
5) In the United States, out-of-pocket spending on health care is about ________ percent of all
health care spending.
A) 2
B) 12
C) 33
D) 48
Answer: B
Topic: Health Care
*: Recurring
achieving it
6) Based on the current rate of growth, health care spending as a percentage of GDP through
Medicare, Medicaid, and other U.S. government programs is expected to
A) stabilize within the next 20 years.
B) account for a majority of spending as a percentage of GDP within 5 years.
C) slow down during this decade.
D) double over the next 40 years.
Answer: D
Topic: Health Care
*: Recurring
achieving it
7) The Congressional Budget Office estimates that the payments to settle malpractice lawsuits
and the premiums doctors pay for malpractice insurance account for ________ of health care
costs in the United States.
A) between 20 and 30 percent
B) roughly half
C) less than 1 percent
D) a vast majority
Answer: C
Topic: Health Care
*: Recurring
achieving it
71
8) Uninsured patients receiving treatments at hospital emergency rooms that could have been
provided less expensively at doctor's offices account for ________ of health care costs in the
United States.
A) between 1 and 4 percent
B) approximately 25 percent
C) almost 40 percent
D) between 15 and 20 percent
Answer: A
Topic: Health Care
*: Recurring
achieving it
9) Growth in labor productivity in health care has been ________ labor productivity in the
economy as a whole.
A) approximately equal to
B) slightly faster than
C) almost twice as fast as
D) less than half as fast as
Answer: D
Topic: Health Care
*: Recurring
achieving it
10) Of the following, which has most likely contributed the most to the rapid rise in health care
costs in the United States?
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
achieving it
72
11) The aging of the U.S. population has tended to ________ spending on health care, and the
development of new drugs and medical equipment has tended to ________ spending on health
care.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Answer: A
Topic: Health Care
*: Recurring
achieving it
12) In the United States, health care spending on people over age 65 is ________ on people aged
18 to 24.
A) one third as much as
B) twice as much as
C) six times greater than
D) forty times greater than
Answer: C
Topic: Health Care
*: Recurring
13) The number of people receiving Medicare coverage is expected to ________ by the year
2025.
A) reach 5 million by
B) stabilize
C) decline by 10 percent
D) grow to 74 million
Answer: D
Topic: Health Care
*: Recurring
73
14) The Congressional Budget Office estimates that most of the increase in federal spending on
Medicare and Medicaid will be due to
A) the aging population.
B) increases in the cost of providing health care.
C) increases in immigration.
D) declining income levels.
Answer: B
Topic: Health Care
*: Recurring
achieving it
15) In the United States, consumers usually pay ________ than the true cost of medical treatment
because of ________.
A) more; adverse selection
B) more; rising insurance premiums
C) less; third-party payers
D) less; rising insurance deductibles
Answer: C
Topic: Health Care
*: Recurring
achieving it
16) Because consumers who have insurance provided by their employers usually only pay a
deductible for a visit to the doctor's office
A) they demand a larger quantity of health care services than they would if they paid a price that
better represented the true cost of providing the service.
B) they demand a smaller quantity of health care services than they would if they paid a price
that better represented the true cost of providing the service.
C) the doctors supply a smaller quantity of health care services than they would if the consumer
paid a price that better represented the true cost of providing the service.
D) the insurance companies provide a larger quantity of health care services than they would if
the consumer paid a price that better represented the true cost of providing the service.
Answer: A
Topic: Health Care
*: Recurring
74
deductible for a visit to the doctor's office
A) employers have more incentive to allow employees time off for doctor visits.
B) doctors have less incentive to control their costs.
C) insurance companies have more incentive to approve medical procedures for their policy
holders.
D) consumers have less incentive to visit the doctor's office on a more frequent basis.
Answer: B
Topic: Health Care
*: Recurring
Figure 7-4
Figure 7-4 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 7-4. If consumers paid the full price of medical services, the price they
would pay is
A) $25.
B) $40.
C) $55.
D) >$55.
Answer: B
Topic: Health Care
*: Recurring
75
19) Refer to Figure 7-4. If consumers paid the full price of medical services, the equilibrium
quantity would be
A) 200.
B) 500.
C) 700.
D) >700.
Answer: B
Topic: Health Care
*: Recurring
20) Refer to Figure 7-4. With insurance and a third-party payer system, what price do doctors
receive for medical services?
A) $25
B) $40
C) $55
D) >$55
Answer: C
Topic: Health Care
*: Recurring
21) Refer to Figure 7-4. With insurance and a third-party payer system, what price do
consumers pay for medical services?
A) $25
B) $40
C) $55
D) >$55
Answer: A
Topic: Health Care
*: Recurring
76
22) Refer to Figure 7-4. With insurance and a third-party payer system, the equilibrium quantity
of medical services is
A) 200.
B) 500.
C) 700.
D) >700.
Answer: C
Topic: Health Care
*: Recurring
23) Refer to Figure 7-4. The efficient price of medical services is

A) $25.
B) $40.
C) $55.
D) >$55.
Answer: B
Topic: Health Care
*: Recurring
24) Refer to Figure 7-4. The efficient quantity of medical services is

A) 200.
B) 500.
C) 700.
D) >700.
Answer: B
Topic: Health Care
*: Recurring
77
25) Refer to Figure 7-4. With insurance and a third-party payer system, what is the amount of
the deadweight loss?
A) $0
B) $1,500
C) $3,000
D) $9,500
Answer: C
Topic: Health Care
*: Recurring
26) When consumers pay only a fraction of the true cost of medical services, their demand
increases. The marginal cost of producing these extra services
A) is greater than the marginal benefit consumers receive from them.
B) is less than the marginal benefit consumers receive from them.
C) is equal to the marginal benefit consumers receive from them.
D) is zero due to the insurance payments.
Answer: A
Topic: Health Care
*: Recurring
27) In addition to covering the costs of unpredictable events, health insurance typically covers
many planned expenses, such as routine checkups, annual physicals, and the cost of vaccinations.
Because of this, health insurance
A) discourages overuse of health care services.
B) encourages overuse of health care services.
C) generates an efficient quantity of health care services.
D) is not accepted by most doctors and hospitals.
Answer: B
Topic: Health Care
*: Recurring
78
28) Of the following U.S. presidents, which was the first to propose a national health insurance
program to Congress?
A) Barack Obama
B) Bill Clinton
C) John F. Kennedy
D) Harry Truman
Answer: D
Topic: Health Care
*: Recurring
29) Higher 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: A
Topic: Health Care
Special Feature: Solved Problem: Recent Trends in Health Care
30) Greater 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: D
Topic: Health Care
79
31) All of the following are part of the "individual mandate" provision of the Patient Protection
and Affordable Care Act (ACA) except
A) individuals were allowed to opt out of the insurance program if they could prove they had no
serious health issues and did so before the act fully took effect in the year 2014.
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 will be required to have health
insurance that meets certain basic requirements.
Answer: A
Topic: Health Care
*: Recurring
32) All of the following are part of the "state health insurance marketplaces" provision of the
Patient Protection and Affordable Care Act (ACA) except
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) the marketplaces offer health insurance policies that meet certain specified requirements.
Answer: B
Topic: Health Care
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80
33) Which of the following is a part of the "employer mandate" provision of the Patient
Protection and Affordable Care Act (ACA)?
A) Every firm with more than 3 full-time employees must offer health insurance to its employees
and must automatically enroll them in the plan.
B) Small businesses with fewer than 50 employees are exempt from being required to participate
in the program.
C) Firms with 50 or more full-time employees must offer health insurance or pay a $3,000 fine to
the federal government for every employee who receives a tax credit from the federal
government for obtaining health insurance through a health insurance marketplace.
D) Every resident of the United States must have health insurance that meets certain basic
requirements.
Answer: C
Topic: Health Care
*: Recurring
34) For many small firms, providing health insurance for their workers
A) has decreased in cost over the past 10 years.
B) represents their most rapidly increasing cost.
C) costs virtually nothing under the ACA.
D) encourages them to hire more full-time workers.
Answer: B
Topic: Health Care
Special Feature: Chapter Opener: How Much Will You Pay for Health Insurance?
35) All of the following are part of the "regulation of health insurance" provision of the Patient
Protection and Affordable Care Act (ACA) except
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
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81
36) All of the following are part of the "taxes" provision of the Patient Protection and Affordable
Care Act (ACA) except
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
37) The Congressional Budget Office estimates that the Patient Protection and Affordable Care
Act (ACA) will
A) increase federal government spending by about $2 trillion over 10 years.
B) cost the government significantly more than the additional taxes and fees enacted under the
law will bring in.
C) eliminate the budget deficit within 10 years.
D) actually reduce government spending over a 20 year period.
Answer: A
Topic: Health Care
*: Recurring
38) The Patient Protection and Affordable Care Act (ACA) is scheduled to be fully implemented
by 2019, at which point
A) current budget cuts are expected to have completely offset the cost of the program.
B) more than 30 million additional individuals are expected to have health care coverage.
C) all hospitals in the United States will be taken over by the federal government.
D) private health insurance companies will no longer exist in the United States.
Answer: B
Topic: Health Care
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82
39) Some economists and policymakers who are in favor of government-provided health care
believe that providing health care will generate
A) additional moral hazard.
B) positive externalities.
C) greater asymmetric information.
D) more adverse selection.
Answer: B
*: Recurring
40) Economists who support market-based reforms for health care believe that increased
competition among providers of health care would ________ costs and ________ economic
efficiency.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Answer: C
Topic: Health Care
*: Recurring
achieving it
41) A goal of market-based reforms of the health care system is to give patients an incentive to
pay more attention to the prices of medical services. This would tend to ________ economic
efficiency by ________ the costs of medical services
A) increase; increasing
B) increase; decreasing
C) decrease; increasing
D) decrease; decreasing
Answer: B
Topic: Health Care
achieving it
Special Feature: Making the Connection: How Much Is That MRI Scan?
83
42) Most employees ________ pay taxes on the value of health insurance provided by
employers, and most people ________ get a tax break when buying individual health insurance
policies.
A) do; do
B) do; do not
C) do not; do
D) do not; do not
Answer: D
Topic: Health Care
*: Recurring
achieving it
43) Some economists have proposed making the tax treatment of employer-provided health
insurance the same as the tax treatment of individually purchased health insurance and out-of-
pocket health care spending. Such changes would make it more likely that
A) consumers would pay prices closer to the actual costs for routine medical care.
B) employers would provide more generous medical coverage to their employees.
C) insurance deductibles would decrease.
D) the quantity of medical services demanded would increase.
Answer: A
Topic: Health Care
*: Recurring
achieving it
44) Economists John Cogan, Glenn Hubbard, and Daniel Kessler have estimated that repealing
the tax preference for employer-provided health insurance would
A) significantly reduce the effectiveness of the health care received by those enrolled in these
programs.
B) increase overall spending on health care as consumers would have to pay a higher price for
medical services.
C) drive up prices for health care coverage since insurance reimbursements to doctors would be
reduced.
D) reduce spending by people enrolled in these programs by 33 percent.
Answer: D
Topic: Health Care
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achieving it
84
45) Which of the following reforms could potentially reduce spending on health care without
reducing the effectiveness of health care received?
A) nationalize health care so that all health services are government funded and operated
B) give every citizen a fixed amount of money that can only be spent on health care services
C) reimburse consumers for preventive health care expenditures so as to avoid costly emergency
medical treatments in the future
D) standardize the tax treatment of employer-based health insurance benefits and private
spending on health care
Answer: D
Topic: Health Care
*: Recurring
achieving it
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.
46) 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 still pay less than the full cost of medical treatment. This would result in
the market equilibrium price of medical services being ________ than the efficient equilibrium
price, and the market equilibrium quantity of medical services being ________ than the efficient
equilibrium quantity.
A) greater; greater
B) greater; less
C) less; greater
D) less; less
Answer: A
Topic: Health Care
achieving it
Special Feature: Making the Connection: The Post-Launch Problem: The Affordable Care Act's
Persistently High Administrative Costs
85
47) Basic supply and demand analysis indicates that having firms rather than the government
provide health insurance to workers
A) changes both the composition of the compensation that firms pay and its level.
B) changes the composition of the compensation that firms pay, but does not change its level.
C) does not change the composition of the compensation that firms pay, but does change its
level.
D) changes neither the composition of the compensation that firms pay nor its level.
Answer: B
Topic: Health Care
Special Feature: Making the Connection: Are U.S. Firms Handicapped by Paying for Their
Employees' Health Insurance?
48) In 2014, employees covered by company-provided health insurance paid ________ percent
of the cost of their own health insurance.
A) 3
B) 18
C) 37
D) 65
Answer: B
Topic: Health Care
Special Feature: Economics in Your Life: Is Your Take-Home Pay Affected by What Your
Employer Spends on Your Health Insurance?
49) 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
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achieving it
86
50) 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
achieving it
51) 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
achieving it
52) 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
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achieving it
87
53) 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
achieving it
54) 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
achieving it
55) 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
achieving it
88
56) ________ 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
achieving it
57) 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
achieving it
58) 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
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achieving it
89
59) ________ 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
achieving it
60) 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
61) 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
90
62) 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
achieving it
63) 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
achieving it
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
91
65) 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
Figure 7-5
Figure 7-5 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.
66) Refer to Figure 7-5. 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
92
67) Refer to Figure 7-5. 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
68) Refer to Figure 7-5. 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
69) Refer to Figure 7-5. 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
93
70) Refer to Figure 7-5. 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
71) Refer to Figure 7-5. The efficient price of medical services is

A) $40.
B) $55.
C) $65.
D) > $65.
Answer: B
Topic: Health Care
*: Recurring
72) Refer to Figure 7-5. The efficient quantity of medical services is

A) 400.
B) 800.
C) 1,200.
D) > 1,200.
Answer: B
Topic: Health Care
*: Recurring
94
73) Refer to Figure 7-5. 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
74) 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
Special Feature: Chapter Opener: How Much Will You Pay for Health Insurance?
75) 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
95
76) 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
77) 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
78) 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
96
79) 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
80) 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
81) 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
97
82) 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
83) 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
84) 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
*: Recurring
98
85) 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
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achieving it
86) 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
87) 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
99
88) 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
Answer: B
Diff: 2 Page Ref: 241-242/171-172
Topic: Health Care
achieving it
Special Feature: Making the Connection: How Much Is That MRI Scan?
89) 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
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90) 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
achieving it
100
91) 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
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92) 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
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achieving it
93) 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
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achieving it
101
94) 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
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.
95) 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
achieving it
Special Feature: Making the Connection: The Post-Launch Problem: The Affordable Care Act's
Persistently High Administrative Costs
102
96) The rising cost of malpractice insurance 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
97) "Cost disease" refers to the tendency for low productivity in the service sector to lead to
higher costs in those industries.
Answer: TRUE
Topic: Health Care
*: Recurring
achieving it
98) Under the Patient Protection and Affordable Care Act (ACA), residents who do not have
health insurance will not be allowed to seek employment.
Answer: FALSE
Topic: Health Care
*: Recurring
99) Under the Patient Protection and Affordable Care Act (ACA), insurance companies will be
required to participate in a high-risk pool that will cover individuals with pre-existing medical
conditions.
Answer: TRUE
Topic: Health Care
*: Recurring
103
100) Those who favor changes in the market for health care that would make it more like the
markets for other goods and services are generally in favor of universal health care coverage.
Answer: FALSE
Topic: Health Care
*: Recurring
achieving it
101) In most circumstances, employees do not pay taxes on the value of health insurance their
employers provide them.
Answer: TRUE
Topic: Health Care
*: Recurring
achieving it
102) 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
increase.
Answer: FALSE
Topic: Health Care
*: Recurring
achieving it
103) The Congressional Budget Office estimates that the additional taxes and fees enacted under
the ACA will be enough to pay for the plan and reduce the federal government's budget deficit.
Answer: FALSE
Topic: Health Care
*: Recurring
achieving it
104
104) Since 1960, out-of-pocket spending on health care has increased sharply as a fraction of all
health care spending.
Answer: FALSE
Topic: Health Care
*: Recurring
achieving it
105) By 2015, spending on federal health care programs such as Medicare and Medicaid had
grown to 6 percent of GDP.
Answer: TRUE
Topic: Health Care
*: Recurring
achieving it
106) 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
107) "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
achieving it
105
108) 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
109) 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
110) 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
achieving it
111) In most circumstances, employees pay taxes on the value of health insurance their
employers provide them.
Answer: FALSE
Topic: Health Care
*: Recurring
achieving it
106
112) 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
achieving it
113) 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
achieving it
114) In the United States, health care spending as a percentage of GDP has declined since 1965.
Answer: FALSE
Topic: Health Care
*: Recurring
achieving it
115) 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
achieving it
107
116) What has happened to health care's share of gross domestic product in the United States
since 1965? How does this compare to what has happened to out-of-pocket spending on health
care as a percentage of all spending on health care?
Answer: Health care's share of gross domestic product in the United States has increased from
less than 6 percent in 1965 to nearly 18 percent in 2015, and is projected to continue rising in
future years. Out-of-pocket spending on health care as a percentage of all spending on health
care has steadily declined, falling from 48 percent in 1960 to 12 percent today.
Topic: Health Care
*: Recurring
achieving it
117) Briefly describe the 6 main provisions of the Patient Protection and Affordable Care Act
(ACA)?
Answer:
1. Individual mandate requires that every resident of the United States have health insurance or
be subject to a fine.
2. State health insurance marketplaces which offer health insurance policies are required to be
established in every state.
3. Employers are mandated to offer health insurance to employees, or in some cases, pay a fee
to the federal government for every employee who receives a tax credit for obtaining insurance
through a health exchange.
4. Insurance companies are required to participate in a high-risk pool and must provide health
coverage for dependant children up to age 26. Also, lifetime dollar maximums are prohibited and
limits are placed on deductibles and waiting periods for coverage to take effect.
5. Some Medicare reimbursements will be reduced.
6. New taxes have been and will be phased in to help fund the program.
Topic: Health Care
*: Recurring
108
118) Which of the following factors help to explain the sustained increases in health care
spending in the United States, and which do not?
a. the additional paperwork, duplication, and waste generated in the U.S. health care system
compared to systems in other countries
b. the increasing costs of malpractice insurance and malpractice lawsuit settlements
c. the number of uninsured patients receiving hospital treatment that could have been performed
at a lower cost in doctors' offices
d. the slow growth in labor productivity in health care compared to that in the economy as a
whole
e. the aging population
f. increases in the cost of providing health care
Answer: Factors "d," "e," and "f" do help explain the sustained increases in health care spending
in the United States.
Factors "a," "b," and "c" do not explain the sustained increases in health care spending in the
United States.
Topic: Health Care
*: Recurring
achieving it
109
119) Suppose consumers pay less than the true cost of medical services because a third party,
such as an insurance company, pays most of the bill. Draw a graph showing the supply and
demand for medical services with and without a third-party payer. Identify the market
equilibrium without insurance, the market equilibrium with insurance, and the area representing
the deadweight loss. Be sure to label the efficient and the market prices and quantities.
Answer:

Topic: Health Care
*: Recurring
achieving it
120) 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
achieving it
110
121) 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
achieving it
122) 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?
111
Figure 7-6
Figure 7-6 represents the supply and demand for medical services with and without a third-party
payer.
123) Refer to Figure 7-6. 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
achieving it
112
Another random document with
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study, till now I know, father, I can help you in any work of
the kind you wish to carry on. It was my passion for this
study, my sinful, selfish ambition to prove to you and the
world what a woman could do, that led me soon after my
mother's death to neglect other and more important duties.
Ay, and with deep sorrow I confess it, it was my being so
absorbed in the study of mathematics that made home so
cheerless for my brother, and brought such bitter sorrow on
us all."
Dr. Warner started, but said not a word for some minutes;
then pushing a slate and pencil which lay near into
Priscilla's hand, he said, "Let me try you."
And for more than an hour, he tested her with the most
abstruse problems. They were all, to his utter amazement,
carefully solved.
"And you have had no teacher, you say?" he queried.
"Only as regards the rudiments of the science, father," she

answered. "Austin taught me those."
"Austin! Then he knew?"
"Yes, he did; but at my request, he kept my secret."
"Was that right, Priscilla—a secret from me?"
"You forget, father," she replied, "how often you spoke with
contempt of women meddling with subjects out of their
sphere. You remember how angry you were when you found
I had begun to study astronomy; and how, when I asked
you to try me as regarded my knowledge of that subject,
you refused to do so. O father, I could not after that tell
you."
Once again the professor examined his daughter, and after
hearing her correct answers, he bent his head on his hands,
and, as if speaking to himself, said, "God be praised that
one of my children has so fully inherited my father's talent,
though it is only a girl."
And drawing his daughter into his arms, he kissed her as he

had never done since her birth.
From that day Priscilla could no longer complain of her

father's disparagement of her talents. Many pleasant hours
were spent in his study, sometimes transcribing for him or
reading aloud some book on his favourite subject. And after
studies were ended, Priscilla would open the Book of Life
and read aloud of Him "in whom are hid all the treasures of
wisdom and knowledge," and yet who hath declared by his
Spirit that "the wisdom of this world is foolishness with
God," so that "he that glorieth, let him glory in the Lord."
And the old man as he listened became more and more as a

little child, and as such more fully entering the kingdom of
heaven, led therein by the hand of his daughter, who on her
part was becoming day by day liker the Master she loved
and served, seeking not her own but her neighbour's good.
Shortly after the scene we have written of, Prissy wrote the
whole account of it to her loved brother, ending her letter by
saying: "And now, dear Austin, I can see God's over-ruling
loving hand in causing so many stumbling-blocks to have
arisen in the way of my prosecuting my favourite study. It
was indeed well that it should be so, for pride and foolish
ambition were the sources of my desire to excel in it. Now, I
trust, I can truly say the talent which he has given me I
have laid at, his feet and consecrated to his service. And in
being able, in however small a way, to help my father, and
Archie, and Joe Smith in their loved study, I am more than
satisfied. And I realize every day more and more what
Harry Lascelles and you, dear Austin, have done long ago—
that the noblest work that man or woman can be engaged
in on earth is, by the prayerful performance of daily duties,
to seek to extend the kingdom of God."
Blindness was indeed a sore trial to Dr. Warner. His whole

life had been spent in study; books constituted his world, in
the reading of which he had spent so much of his time that
he had neglected too much his family and social ties. Now
he was compelled to rest. True, with Prissy's assistance, he
continued the book which he was engaged writing; but
hours once devoted to study were now spent in comparative
idleness. In everything he turned to Priscilla for help, and
was becoming almost too dependent on her.
Sometimes Prissy's numerous duties almost overwhelmed

her, for in addition to her household cares she had to
superintend almost entirely the education of the two little
ones.
One day when she was teaching Claude, wondering how she
would get through the day's work, a light step ran up the
stair, and the door opening displayed the bright face of
Gabrielle M'Ivor.
GABRIELLE M'IVOR'S VISIT.
"Why, Prissy ma chère," she said, "how tired you look! I

don't believe you have had one regular good walk for a
month; and 'tis so charming out of doors to-day. There are
tiny icicles hanging from the eaves, and the trees have a
coating on them like silver. What do you call it?—Filigree.
And it is so lovely, they glitter so brightly in the sunshine.
See now, Prissy, I shall help le petit Claude a bit, whilst you
go and get ready for a walk. Nay, chère amie, do not shake
thy head; thou must go and get some fresh air, or I shall
tell papa to speak to Dr. Warner about it."
"Oh no, Gabrielle, do not do so, I pray," pleaded Prissy. "It

would only vex my father. But indeed I have not time to
walk to-day. Claude has been longer than usual over his
lessons; and now it is the hour I go to read to my father;
and after that I must write to Austin in time to catch the
post. And then comes the children's dinner, and—"
But Gabrielle listened to no more.
"No, Prissy; you must get some fresh air and exercise. You
are killing yourself; and then when you have succeeded in
so doing, what is to become of votre père? Now there is a
poor woman in the town who says she 'be's greatly in want
of a sight of Miss Warner,' for her spirits be down, and
there's none can comfort her like the miss from the Grove. I
be's 'too much of a French woman' for she, you know, so do
go, there's a chère petite, and I shall stay here and read to
the good professor for an hour."
Prissy's face brightened, both at the girl's cheery words,

and at the prospect of getting what, truth to tell, she had
been longing to obtain—a brisk walk in the winter sunshine,
if only she could do so without neglecting her home duties.
"Well, Gabrielle, la belle Gabrielle," she said, "you always do

contrive to get your own way somehow; and if you would
read to papa for one hour, I would like to take a short walk
and go to the town to see some of the people there. Now let
us make an inroad on papa in his study, and leave Claude to
finish that sum alone."
Arm in arm the two girls went into the library, surprising the
professor as he sat absorbed in thought.
Gabrielle's silvery voice broke the silence. "Dr. Warner," she

said, "will you let me take Prissy's place for a while to-day?
Vous voyez the fairies have been at work all night covering
the trees with silver, and it is so lovely out of doors, and I
wish Prissy to see it ere it vanishes; so I have come to read
to you—not on mathematical subjects, please. But I am
ready for anything else you like; only say I may remain."
Dr. Warner smiled. "Surely, if you will," he said. "I know

Priscilla does not go out enough, especially since I have had
this bad cold, and she has not had me to take charge of out
of doors.—So, my daughter, la belle Francaise shall read to
me, and we'll leave the mathematical papers till night."
Prissy pressed a kiss on her father's brow, saying cheerfully,

"As you like it, papa; only don't let Gabrielle usurp my
place!"
"No fears of that," said her friend. "But, Prissy, suppose you
take little Ruth with you, and leave her to play for an hour
in our cottage with Jeanie. And you can tell ma chère mère
that I am here, and she need not expect me back for a long
while."
"Very well," said Prissy, "I'll do so. Ruth will be charmed to

go. And see you take good care of papa."
And so saying, Prissy Warner, giving her friend a bright

smile, ran off to get herself and Ruth ready for a walk in the
bright winter sunshine.
CHAPTER XIV.
THE CHRISTMAS TREE.
"Christmas gifts for thee,

Grand and free!
Christmas gifts from the King of love,
Brought from his royal home above;
Brought to thee in the far-off land,
Brought to thee by his own dear hand "
Brought to thee by his own dear hand.
THE Christmas holidays had just commenced, when Archie

Warner, followed by Claude and little Ruth, ran into the
parlour of the Grove, where they found Priscilla seated at
work.
"Hurrah for six weeks' holidays!" said Archie, throwing a

bundle of books on the table. "And Austin will be here on
Christmas eve, and we must give him a famous welcome,
Prissy. And we want to get up a tree this year. You know we
used to have one always when mother was alive; and we
could have a jolly one this year. The M'Ivors could come,
and—"
"O Archie," interrupted his sister, "don't speak of it. Think

on our poor father; and then how could I possibly spare the
time to prepare it? I am sorry, but really I don't think it
could be managed."
A shade crossed the boy's face.
And even little Ruth said, "O Prissy, tan't we have a tree?
'Twould be so nice."
But Archie muttered—
"Oh, well, it does not matter, only all the other fellows are
having one; and as to our father, I'm sure I wouldn't for
worlds have anything he would not like, or you either,
Prissy. I did not think about the trouble, but just hearing all
the others talking about the fun they were going to have in
the holidays put it into my head."
"All the other fellows are having one." The words rung in
Prissy's ears. It was true enough; she knew they would.
And Archie and even Claude would be contrasting the bright
holiday-making of their companions with the dulness of
their home. No; that must not be, cost what it might. The
boys must have a bright Christmas day.
So seeing the effort that Archie was making to throw off his
disappointment, she said, "Well, I will tell you what, boys—
I'll try and manage it for you, if you will promise to do all
you can to help me; that is, if our father will agree to it, for
I will have no secret from him. Oh, poor father! If only his
sight could be restored. And, you know, the London oculist
has held out some faint hope that an operation may prove
effectual, or at least partially so."
The young faces round her brightened as Prissy spoke,

though Archie had the grace to say, "Oh! But it would be a
shame, Prissy, after all, to put more work on you; still, if my
father says we may, we would try and save you trouble, and
I know the M'Ivors would help. Jules is so clever at making
things, and Miss M'Ivor and André also. Oh, it will be
famous if we can have it, and give Austin a surprise. You
are a dear, good old Prissy!"
"Come along then, all of you, and we will go to the study

and see what our father thinks about it. Only remember you
are to ask him yourselves."
Archie and Claude shrunk back at those words.
But Ruth ran off to her father, and jumping on his knee,
which was her favourite seat, she said, "Father, O father, we
wants to have a Christmas tree all covered with lights and
pretty things, 'cause Austin's 'turning home; and Prissy says
we may, if you'll only let us."
"A Christmas tree, my little Ruth?" said her father, stroking

her silken curls as he spoke. "Ah me! 'Tis long since there
was one in this house. How old are you, my little maid?"
"Why, father, I'm six years old. But what has that to do with
a tree? I'm big enough to see one, surely. Do say we may
have one. Archie wants it, and Claude too."
"Yes, father," chimed in both boys; "we would like it, if you
are willing."
The professor paused for a moment, then replied, "Certainly

you may; only on one condition, boys: you must promise
not to let all the trouble fall on your sister, for she has more
than enough on her shoulders already. It is a marvel to me
the amount of work she gets through, mental and
otherwise. She puts many a man to shame, though she is
'only a girl.'"
Prissy laughed; the once dreaded sobriquet had lost its

terrors. "Well, father," she said, "if you agree, I second the
boys, for I like the thought of having a tree as much as they
do, for, you see, in one sense I am still 'only a girl.'"
A loud shout of "Thanks, father, thanks," rung round the

room, till Prissy dismissed them all, saying, "Now do run
down to the M'Ivors and enlist them to help in the
Christmas tree."
"That will be capital," said Archie. "And may we take Ruth

also?"
"Yes, you may, if you won't let her get into mischief. And,
Archie, please just look in on Joe Smith for a moment, and
tell him that, if possible, I will come down to-morrow and
help him with his studies. Poor Joe! Isn't it a pity we can't
have him at our Christmas tree? He is so much stronger
now, if he could only be got here, he would enjoy it. Now off
with you all. I don't wish to see any of you for a couple of
hours at least."
"All right," said Archie laughing; "but—" and he lingered for

a moment behind the others as he said, "remember that
during holiday time, I'm to read to father every day. He is
not to learn to depend on his daughter for everything,
though she is a jolly good daughter and sister also." And so
saying, he endorsed his opinion by a loud-sounding slap on
his sister's shoulder, then ran off, slamming the door after
him in true boy-like fashion, which made his father exclaim
—
"Gently, Archie, gently!" Then turning to Prissy, he said, "I

fear, my daughter, this Christmas tree plan will throw a
great deal of extra trouble on you. If so, just tell me, and I
will put a stop to it at once."
"Oh no, father; I would not have it stopped on any account.

At first I was selfish enough not to wish to have it at all; but
now that I see how set the boys and little Ruth are on
having it, I am thankful I yielded. I would like Archie and
Claude to have a bright home Christmas. Archie is a fine
boy, father, and a steady one."
"Yes," said Dr. Warner, "he is;" and he sighed as his

thoughts wandered to the son whom in face and figure
Archie so strongly resembled. "Dr. Sparling, too, speaks
highly of him. He says his talent lies more for languages
than for mathematics; he also says his general conduct is
so good that he sets an example to the whole school. He
has to thank you, Priscilla, for the home influence he has
had. You are a comfort to us all, my daughter."
A flush of pleasure mantled Prissy's face. A word of

commendation from her father was very sweet to her.
But she said smilingly, "Ah! then, father, you confess that a
woman may be a comfort in her home and yet study even
mathematics?"
She spoke in a jesting tone, and expected a reply in a like

strain. She was surprised, therefore, when her father laid
his hand on her head, and said solemnly, "I do confess it,
my child, when a woman has the grace of God in her heart
to enable her to keep her different duties in their right
place, and to prevent her being conceited and puffed up by
her mental attainments, or careless as regards household
matters. And now, my daughter, if you can spare me an
hour or two to act as my amanuensis, I will be well
pleased."
"Certainly, father," was the ready reply, and in a few

minutes father and daughter were busy at work.
Whilst they were so engaged, Archie, Claude, and Ruth had

made their way to the cottage where the M'Ivors lived.
Entering the bright little parlour, Archie soon made their
errand known.
"A Christmas tree!" said Gabrielle, jumping up from her

work. "A Christmas tree! That will be good. Yes, of course,
Archie, tell Prissy we will all be charmed to help her. And
you also, maman," she said, turning to her mother—"you
are so clever with your fingers, you will assist?—Oh, it is
delightful. And all the little ones are to come, did you say?"
"Yes; and if Mr. and Mrs. M'Ivor would come also, my father
and Prissy said they would be delighted to see them; and,
of course, André as well."
Gabrielle clapped her hands with glee. "Oh, that is better

and better! You will go? Do say you will, chère maman!"
Mrs. M'Ivor smiled at her daughter's eagerness, but
assented to the proposal, unless the evening proved very
cold. "For," she said, turning to Archie, "your Christmas is
très-froid, très-froid sometimes."
"Ah!" he replied. "But this year, madam, it is going to be

fine; every one says we are going to have a bright
Christmas."
Then turning to Gabrielle and the boys, an animated

discussion arose on decorations and suitable presents.
Coloured paper was produced at once, and ere long,
Gabrielle's clever French fingers had cut out some really
tasteful ornaments for the tree. The time slipped away only
too quickly, and on their way home, Archie found he had
just a minute or two to spend with Joe Smith, who hailed
with pleasure the announcement of a visit from Miss
Warner.
"You see, Mr. Archibald," he said, "she is such a kind,

patient teacher; and if ever I become a scholar, and of any
use in the world, it will all, under God, be owing to her and
Mr. Austin. Ay, and more than that I owe to them, for it was
they who told me of the love of Jesus, and led me into the
kingdom of God. Please tell Miss Warner I will be delighted
to see her to-morrow."
And Archie, promising to do so, set off homewards, holding

little Ruth by the hand. There was a sober, thoughtful look
on his face, for Joe's words had set him thinking.
Did he, he asked himself, love the Lord Jesus, as Austin,

Prissy, and Joe Smith did? And like them, was he helping on
Christ's kingdom? It was not necessary in order to do so to
become a minister or missionary; for Prissy had often
spoken to him on that subject, and her life had proved to
him that it is in little things as well as in great that God can
be glorified.
And as Archie Warner walked home on that bright

December day, he began to wish to be a Christian—at all
events, some times, perhaps when school duties and
pleasures did not so fully occupy him. And so he turned his
thoughts to the pleasures of the hour, and forgot that it is
written:
"Seek ye first the kingdom of God."
CHAPTER XV.
NEWS FROM A FAR COUNTRY.
"Well hath she learned to sympathize with every hope

and fear;
Well hath she learned the sorrowing heart to brighten
and to cheer."
CHRISTMAS had come at last! A good old-fashioned one it

proved. Snow had fallen heavily for some days before, and
now it lay inches deep on hill and dale. A sharp frost had
set in, and the crystal-like icicles hung from the eaves of
the house and branches of the leafless trees. Beautifully
they glistened under the light of the moonbeams as they
touched them with their silver light, and glistened on the
white canopy of snow that lay thickly on the garden and
grounds surrounding the Grove.
Austin and Prissy Warner stood for a few minutes alone at a

window gazing at the fair scene.
"How lovely it is to-night!" said Prissy. "And the children are

so happy at the prospect of the Christmas tree. But oh,
Austin, if our father could only see it; and if Lewis were with
us, or if we knew where he was."
Her head drooped as she spoke, and the tears that filled her
eyes dimmed the beauties of the outside world.
Her brother put his arm lovingly round her, and said in
answer to her last words, "God knows, dear Prissy, and his
arm is round our erring brother wherever he is; and, sister,
somehow I can't despair of Lewis. I know how far wrong he
was led by evil companions; but Lewis had many noble
traits of character. His affection for his home was deep, his
love to our father intense, and he cherished the memory of
our mother fondly."
"But, Austin," interrupted Prissy, "if that were all so, how
came he to do what he knew would well-nigh break his
father's heart, and would have grieved so deeply our
mother? How can you reconcile these things?"
"It is difficult, no doubt, to do so," replied Austin. "Lewis, by

nature, was easily led; and then, Prissy, he had not learned
to lean in his weakness on an Almighty strong arm, and so
became a prey to sharpers. But may we not believe that it
was deep shame for the disgrace he had brought on
himself, and dread of seeing his father's grief at it, that
made him fly from home?"
"It may be so," replied Prissy. "There were other causes
which helped to drive him into evil companionship."
"Ah, well," said Austin, "if it were so, Prissy, you have nobly,
as far as possible, made up for your past neglect in that
respect: 'The Lord hath restored to you the years that the
cankerworm hath eaten.' But we must not linger here,
pleasant as it is. Let us go first to our father and see if he is
willing to come to the drawing-room."
As together they entered the study, and the light of the

lamp fell on his sister's face and figure, Austin was struck
with her beauty as he had never been before. Her rich
brown hair was brushed slightly back, displaying her finely-
formed brow. Her deep, thoughtful gray eyes were turned
lovingly towards her father; and her brother observed the
womanly dignity of her whole bearing, which the discipline
of the last few months had greatly enhanced and
developed. Her dress, of some soft crimson stuff, fell in
graceful folds round her, contrasting with the whiteness of
her neck and arms, and adding beauty to the whole of her
appearance. No wonder her brother thought her fair to look
on.
Dr. Warner willingly agreed to go to the drawing-room,

saying, "What although I cannot see the beauties of the
tree, I can at least—thank God!—hear the voices of my
children and friends. Then I have my borrowed eyes always
beside me, you know," and as he spoke he laid his hand on
Prissy's arm. "Yes, my boy," he said turning to Austin, "one
of the greatest of my many mercies is the possession of
such a loving daughter as Priscilla. She has indeed shown
me what noble, true work can be done by 'only a girl.'"
"I knew her real worth long ago, father," said Austin, "and
was sure the day would come when you also would
appreciate it. But who comes here?" he added, as the
study-door was opened, and the vicar entered, followed by
a young man who came forward with an outstretched hand.
Prissy went forward to meet him, and with a start of glad

surprise recognized her old friend Harry Lascelles.
The name escaped her lips, and instantly Dr. Warner was on
his feet. "Harry Lascelles! Is he here? Welcome, a thousand
times welcome, though I can no longer see thee face to
face."
In a moment Harry was beside his old friend. "I am grieved,

so grieved, Dr. Warner, to hear of the trial that has fallen on
you. I only heard of it to-night; for a long time had elapsed
since I had had news from home, and I had begun to get
anxious about you all.—It is pleasant to see you again, Miss
Prissy," he continued; "I can hardly believe my eyes when I
look at you. You were only a girl when I left home, and now
you are a woman."
And had he spoken out his thoughts, he would have added,

"A rarely beautiful one also." But Harry was no adept at
compliments, so he contented himself by letting his eyes
say the words his lips refused to utter.
"Then as to Austin, he has entirely grown out of my

knowledge. Dr. Warner," he said, turning suddenly towards
him, "what tall, fine-looking young men your sons have
become! Why, Lewis is—"
But ere he could say another word, the father had sprung to
his feet, exclaiming—
"Lewis, did you say? What of him? Tell me, Harry, oh, tell
me, is he still alive? My erring but much loved boy!"
Dr. Lascelles gently put the old man back in his chair, then
seating himself beside him, he said, "Yes, Dr. Warner, your
son Lewis is alive. I have seen him, and bear a letter from
him imploring your forgiveness. And I can testify that, in
the highest sense, 'he that was dead is alive again, he that
was lost is found' by the good Shepherd, and is now, as he
says himself, 'seeking first the kingdom of God and his
righteousness.'"
"God be praised," said the father. "Where is he now?"
Ere the question could be answered, Priscilla and Austin had

eagerly repeated it, saying, "Oh, tell us all. How, when, and
where have you seen him? And oh," added Prissy, "has he
forgiven me?"
"Forgiven you?" repeated Harry. "I did not know he had

anything to forgive you. But here is his own letter; it will, no
doubt, tell you all you wish to know. But ere you read it, I
must tell you what I know—"
"About a year ago our ship touched at Sydney, and the

captain told us he would be detained there on business
several weeks. On hearing that, I resolved I would regularly
attend at the hospitals there, and so keep up my medical
knowledge of general cases, which I had very limited
opportunity of doing on board ship. Passing through the
wards one day, my attention was arrested by the face of a
young lad which I seemed to know, and yet was unable to
tell to whom it belonged. I approached the bed, and asked
him some medical questions, when it was plain that the lad
knew me also, but did not wish me to recognize him; for as
he spoke, a deep flush suffused his face, and he turned his
back to me, muttering something about the light. But the
moment I heard his voice, I knew it was Lewis Warner that
lay there."
"My boy! My loved boy!" exclaimed Dr. Warner.
Whilst both Prissy and Austin cried out in dismay, "Lewis

lying ill in a hospital alone in a foreign land!"
"He is all right now," continued Harry. "But let me finish my

story. I had heard from my father all about poor Lewis, and
I at once addressed him by name, saying kindly, 'I am
grieved to see you here, and looking so ill also. Do your
friends know of your illness, and that you are here?'"
"The answer was given in a hard, hoarse way: 'My friends! I

have none. I am called William Smith; don't you see my
name there?' and he pointed to a letter lying on the table
beside him."
"I took his hand and said firmly, 'Lewis, there is no use in
trying to deceive me. I know you; and the moment you saw
me, you recognized your old friend Harry Lascelles. By the
memory of your mother now in glory, whom we both loved
so clearly, speak to me frankly, Lewis, and tell me all—why
you left your home, and how you come to be here.'"
"For one moment he made an effort to repulse me; then,

poor follow, he broke down, and sobbed like a child, crying
every now and then, 'O father! Father! If only he would
forgive me!'"
"Poor boy, poor suffering boy!" said Dr. Warner. "And you
told him, surely, Harry, you told him I had forgiven him long
ago?"
"I did, doctor; and more than that. I told him how his
heavenly Father, against whom he had sinned so grievously,
was wanting to forgive him also, for Christ's sake. I left him
much softened; and the eager way in which he sought news
of you all, showed how his heart clung to his home and to
the dear ones there. He had owed much to a kindhearted
man of the name of Barton, whom I afterwards saw, and
who told me that Lewis had been the means of saving him
from ruin, by preventing him from entering a gambling-
room in Sydney a couple of years before. He and Lewis had
become acquainted with each other shortly before then;
and Barton, having a little money in his pocket, was just
going to try his luck at cards, and invited Lewis to join him,
when the lad, who called himself William Smith, laid his
hand on his arm and implored him not to enter the
gambling-saloon, telling him it might prove his ruin if he did
so."
"'The slip of a lad looked earnest about it,' said Barton (in
telling me the story), 'so much so that I hesitated ere
entering; and whilst I was so doing, I seemed to hear the
voice of my dead mother saying to me, as she did the day
before her death, "Enter not into the path of sinners." So,
turning to the lad beside me, I said, "Well, my lad, I believe
God sent you to me with a warning from him, and by his
help, I'll never cross the threshold of one of these saloons
again."'"
"'Will and I,' he continued, 'became regular chums, and

went to the Kiandra gold diggings, where I picked up a few
nuggets large enough to enable me, when Will grew ill
there, to bring him back here and get him into the hospital,
where—thank God!—you found him, sir.'"
CHAPTER XVI.
"AS A LITTLE CHILD."
"The sun was low in the changing west,
The shadows were heavy from hill and tree,
As the watchman opened the gate of rest—
'I am willing with all my heart,' said he."
HARRY LASCELLES paused a moment ere resuming the tale

he had been telling, for his listeners were overcome with
emotion.
Dr. Warner was the first to speak. "Thank God," he said,

"my boy had learned a lesson on the evil Of gambling; and I
am thankful he was instrumental in saving a fellow-creature
from that terrible sin."
"I always felt sure," interrupted Austin, "that Lewis was led
astray and made the dupe of a set of sharpers who came
here on purpose to catch some of the older schoolboys. I
always knew Lewis's heart was right."
"Lewis's letter," continued Harry, "will give you full

particulars as to what he is now doing; but I want to add
that, ere the six weeks of my stay in Sydney had come to
an end, Lewis had recovered strength; and he had come as
a poor, weak sinner to Jesus, and received forgiveness
through his shed blood. He is very distrustful of himself, but
has obtained, by the teaching of the Holy Ghost, full
confidence in the power of his Saviour to hold him up in the
paths of righteousness. Truly it is in the spirit of a little child
that he has entered into the kingdom of God.—But now,
Austin, you had better read aloud your brother's letter to
your father and sister; and meanwhile my grandfather and I
will go into the drawing-room, where I hear the sound of
little voices, and will await you there. I suppose I'll find my

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7.1 The Improving Health of People in the United States

2) Health care makes up ________ of the U.S. economy.

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

6) A typical consumer of health care in the United States

30) How can improvements in health increase a country's total income?

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

7.2 Health Care around the World

8) In the United States, private health insurance companies

66) What is health insurance?

13) Which of the following is not an advantage of risk pooling?

24) In markets with asymmetric information

25) What is the principal-agent problem?

33) Refer to Figure 7-1. The efficient equilibrium price is

36) Refer to Figure 7-1. At the market equilibrium

42) In the market for insurance

49) The principal-agent problem is a problem

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

71) Refer to Figure 7-2. The market equilibrium price is

73) Refer to Figure 7-2. The efficient equilibrium price is

75) Refer to Figure 7-2. At the efficient equilibrium

76) Refer to Figure 7-2. At the market equilibrium

87) Vaccinations tend to result in a positive externality.

102) What is adverse selection?

103) What is the principal-agent problem?

105) What is moral hazard?

107) What is an externality? Explain how someone receiving a meningitis vaccination is an

Diff: 2 Page Ref: 230

109) What is asymmetric information?

23) Refer to Figure 7-4. The efficient price of medical services is

24) Refer to Figure 7-4. The efficient quantity of medical services is

71) Refer to Figure 7-5. The efficient price of medical services is

72) Refer to Figure 7-5. The efficient quantity of medical services is

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

93) The individual mandate provision of the ACA requires

Diff: 2 Page Ref: 237

123) Refer to Figure 7-6. Answer the following questions:

"And you have had no teacher, you say?" he queried.

"Only as regards the rudiments of the science, father," she

"Austin! Then he knew?"

"Yes, he did; but at my request, he kept my secret."

"Was that right, Priscilla—a secret from me?"

And drawing his daughter into his arms, he kissed her as he

From that day Priscilla could no longer complain of her

And the old man as he listened became more and more as a

Blindness was indeed a sore trial to Dr. Warner. His whole

Sometimes Prissy's numerous duties almost overwhelmed

"Why, Prissy ma chère," she said, "how tired you look! I

"Oh no, Gabrielle, do not do so, I pray," pleaded Prissy. "It

Prissy's face brightened, both at the girl's cheery words,

"Well, Gabrielle, la belle Gabrielle," she said, "you always do