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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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achieving it
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
*: Recurring
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
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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
no related content on Scribd:
zeal of the true Indian-born domestic, who hails a change, a
“tamasha,” anything in the shape of a “feast,” with a joy and energy
totally unknown to the retainers of the folk in these colder latitudes.
Hospitable Mrs. Brande was to have a house and a house-party.
“P.” was absent on official business; but, under any circumstances,
he would not have been a likely recruit for what he called a “new
outbreak of jungle fever.” The Dashwoods, the Booles, the
Daubenys, the Clovers, were to have a married people’s mess.
There were also one or two chummeries, which made people look at
one another and smile! The bachelors, of course, had their own
mess; moreover, there were tents.
Mrs. Langrishe joined neither mess nor chummery, this clever
woman was merely coming as the Clovers’ guest for two days, and
Lalla was Mrs. Dashwood’s sole charge. Mrs. Sladen, of course,
stayed with Mrs. Brande, who had been relegated to the old
commandant’s house, an important-looking roomy bungalow,
standing in a great wilderness of a garden and peach orchard. Once
or twice during the last twenty years it, and one or two other
bungalows, had been let (to the Persian’s great annoyance) for a few
months in the season to needy families from the plains, who only
wanted air, good hill air, and could afford but little else!
Mrs. Brande and her party arrived a whole day before the general
public, travelling comfortably by easy stages through great forests of
pine, oak, or rhododendron, along the face of bold, bare cliffs, across
shallow river-beds, and through more than one exquisite park-like
glade, dotted with trees and cattle—naturally, Mrs. Brande kept a
suspicious eye on these latter. When the travellers reached their
destination, they found that roads had been repaired, lamp-posts
and oil lamps erected, the old band-stand was renovated—servants
were hurrying to and fro, carrying furniture, shaking carpets, airing
bedding and picketing ponies. There were coolies, syces, soldiers,
and active sahibs galloping about giving directions. In fact, Hawal
Bagh had put back the clock of time, and to a cursory eye was once
more the bustling, populous cantonment of forty years ago!
And how did the scanty society who dwelt in those parts relish the
resurrection of Hawal Bagh? To the neighbouring poor hill villagers
this event was truly a god-send; they reaped a splendid and totally
unexpected harvest, and were delighted to welcome the invaders,
who purchased their fowl, eggs, grain, milk, and honey.
Mark Jervis beheld the transformation with mingled feelings. He
had broken with his old life; most people, if they thought of him at all,
believed him to be in England—two months is a long time to live in
the memory of a hill station. Honor—she would be at Hawal Bagh—
she had not forgotten him yet. He would hang about the hills, that he
might catch a distant glimpse of her, or even of her dress. Surely he
might afford himself that small consolation.
As for the Persian, she surveyed the troops of gay strangers from
her aerie with a mixture of transports and anguish.
It was a fine moonlight night early in September, the hills loomed
dark, and cast deep shadows into the bright white valley. The air was
languorously soft, the milky way shone conspicuous, and fully
justified its Eastern name, “The Gate of Heaven.”
There was to be a ball in the old mess-house, and Mark took his
stand on the hill and watched the big cooking fires, the lit-up
bungalows, the hurrying figures; listened to the hum of voices, the
neighing of ponies, the tuning of musical instruments. Could this be
really the condemned, deserted cantonment of Hawal Bagh, that
many a night he had seen wrapped in deathlike silence? The dance
commenced briskly, open doorways showed gay decorations, the
band played a lively set of lancers, and a hundred merry figures
seemed to flit round and pass and repass; whilst the jackals and
hyenas, who had been wont to hold their assemblies in the same
quarter, slunk away up the hills in horrified disgust. Presently people
came out into the bright moonlight, and began to stroll up and down.
Mark recognized many well-known figures. There was Honor, in
white, walking with a little man who was conversing and gesticulating
with considerable vivacity. She seemed preoccupied, and held her
head high—gazing straight before her. Lookers on see most of the
game. The man must be a dense idiot not to notice that she was not
listening to one word he said.
There was Miss Paske, escorted by a ponderous companion with
a rolling gait—Sir Gloster, of course—and Miss Lalla was
undoubtedly entertaining him. It almost seemed as if he could hear
his emphatic “excellent” where he stood. Mrs. Merryfeather and
Captain Dorrington, Captain Merryfeather and Miss Fleet, and so on
—and so on—as pair after pair came forth.
Suddenly he became aware of the fact that he was not the only
spectator. Just below him stood a figure, so motionless, that he had
taken it for part of a tree. The figure moved, and he saw the Persian
lady standing gazing with fixed ravenous eyes on the scene below
them. He made a slight movement, and she turned hastily and came
up towards him. They were acquaintances of some standing now,
and met once or twice a week either among the lepers or about the
cantonment. Mark had never ventured to call at the mysterious little
bungalow, but he sent her offerings of flowers, fruit, and hill
partridges, and she in return admitted him to her friendship—to an
entirely unprecedented extent. Whether this was due to the young
man’s handsome face, and chivalrous respect for her privacy and
her sex, or whether it was accorded for the sake of another, who
shall say?
“You are looking on, like myself,” he remarked, as she accosted
him. “Are you interested?”
“Nay, ‘the world is drowned to him who is drowned,’ says the
proverb. I came to Hawal Bagh to retire from the crowd, and lo! a
crowd is at my gates!”
“This, surely, must be quite a novel sight to you?”
She gazed at him questioningly, and made no answer.
“Of course you have never seen this sort of thing before, English
people in evening dress, dancing to a band?”
“I have known phantoms—yea, I have seen such as these,”
pointing, “in a—dream—thousands of years ago.”
Her companion made no reply, the Persian often uttered dark
sayings that were totally beyond his comprehension. Possibly she
believed in the transmigration of souls, and was alluding to a former
existence.
“Mine are but spirits, whereas to you these people are real flesh
and blood,” she resumed. “You were one of them but three months
ago. Think well ere you break with your past, and kill and bury youth.
Lo, you grow old already! Let me plead for youth, and love. Heaven
has opened to me to-day. She,” lowering her voice to a whisper, “is
among those—I have seen her—she is there below.”
“I know,” he answered, also in a low voice.
“Then why do you not seek her—so young, so fair, so good? Oh!
have you forgotten her sweet smile, her charming eyes? Love, real
love, comes but once! Go now and find her.”
Mark shook his head with emphatic negation.
“What heart of stone!” she cried passionately. “Truly I will go
myself and fetch her here. I——But no—I dare not,” and she covered
her face with her hands.
“Do not add your voice to my own mad inclinations. It is all over
between us. To meet her and to part again would give her needless
pain.”
“Ah! again the music,” murmured the Persian, as the band
suddenly struck up a weird haunting waltz, which her companion well
remembered—they had played it at the bachelors’ ball. “Music,” she
continued, clenching her two hands, “of any kind has a sore effect on
me. It tears my heart from my very body, and yet I love it, yea,
though it transport me to——” She paused, unable to finish the
sentence. Her lips trembled, her great dark eyes dilated, and she
suddenly burst into a storm of tears. The sound of her wild, loud,
despairing sobs, actually floated down and penetrated to the ears of
a merry couple who were strolling at large, and now stood
immediately below, little guessing that another pair on the hillside
were sadly contemplating a scene of once familiar but now lost
delights, like two poor wandering spirits.
“Surely,” said Mrs. Merryfeather, “I heard a human voice, right up
there above us. It sounded just like a woman weeping—crying as if
her heart was broken.”
“Oh, impossible!” scoffed the man. “Hearts in these days are
warranted unbreakable, like toughened glass.”
“Listen! There it is again!” interrupted the lady excitedly.
“Not a bit of it, my dear Mrs. Merry; and your sex would not feel
flattered if they heard that you had mistaken the cry of a wild beast,
for a woman’s voice! I assure you, on my word of honour, that it is
nothing but a hyena.”
CHAPTER XLII.
BY THE OLD RIFLE-RANGE.
A powerful and determined temptation, that was deaf to reason or

argument, struggled hourly to drag Mark Jervis to Hawal Bagh. It
changed its fierce wrestlings, and passionate and even frantic
pleadings to soft alluring whispers. It whispered that life was but an
hour in the æons of time—a drop in the ocean of eternity. Why not
taste the drop—enjoy the hour? Snatch the sunshine and live one’s
little day, ere passing for ever into eternal darkness and oblivion! It
even quoted the Scriptures, and vehemently urged him to take no
thought for the morrow—that sufficient unto the day was the evil
thereof. It seized the brush from the hand of memory, and painted
Honor Gordon as an angel. It babbled of a visit to Mrs. Brande—she
had always been his friend. Surely there was no harm in going to
see her! But the young man sternly silenced alike whisperings or
pleadings. He beat the mad tempter to its knees, choked it, and, as
he believed, put it to death. Why undergo the anguish of parting
twice—why walk across red-hot plough-shares a second time?
For four whole days he held aloof, and never visited the
cantonment—save in his thoughts and dreams. On the fifth he
conscientiously set forth in the opposite direction, and after a long
and aimless ride was astonished to find himself—no, not exactly on
the enchanted ground, but close to the old rifle-range, which lay at
the back of its encompassing hills. To the left dipped a long valley, on
the right of the path towered a forest of rhododendrons and ever-
green oaks, carpeted with ferns, and a blaze of delicate autumn
flowers; here and there the Virginia creeper flared, and here and
there a pale passion-flower had flung abroad its eager tendrils and
attached two noble trees. All at once, a fat white puppy came
bustling through the undergrowth; he was chasing a family of
respectable elderly monkeys, with the audacity common to his age
and race. Truly the pup is the father of the dog; and Jervis, who was
walking slowly with his pony following him, recognized this particular
pup at once as an old friend. He had bought him and presented him
to Mrs. Brande, when her grief was as yet too fresh—and this same
rollicking, well-to-do animal had once been indignantly spurned! To
whom did he now belong? Who was his master or his mistress?
There was a sound of light young footsteps, a crashing of small
twigs, a glimpse of a white dress, and an anxious girlish voice
calling, “Tommy, Tommy, Tommy!”
In another second Honor Gordon ran down into the path, about
thirty yards ahead of Tommy’s donor. She was almost breathless,
her hat was in her hand—possibly it had been snatched off by an
inquisitive branch as she struggled after the runaway. The soft little
locks on her forehead were ruffled, and she had an unusually brilliant
colour.
As Mark’s starving eyes devoured her face he thought he had
never seen her look so lovely. He summoned up all his self-
command—there must be no going back to “old days,” no moaning
over “what might have been.” No; he was the stronger, and must set
a stern example.
For quite twenty seconds there was a dead silence, a silence only
broken by the trickling of a snow-born mountain stream, passing
lingeringly through the ferns and orchids—who seemed to stoop and
bend over—listening intently to its timid silvery song.
“How changed he was!” thought Honor, with a queer tight feeling in
her throat, “only three short months, and the bright look of buoyant
youth had faded from his face.”
“Ah!” she exclaimed, with a supreme effort. “I had a presentiment
that I should see you soon—I dreamt it!”
“Dreams sometimes go by contraries,” he answered, with a rather
fixed smile.
“And how clever of Tommy to find you! The dear dog remembered
you.”
“Well, up to the present he has not shown any symptoms of
recognizing me; on the contrary, he has cut me dead. He is in hot
pursuit of some venerable lumgoors. How long is it since he has
seen me?” asked Mark.
“The day of the bachelors’ ball. I recollect you gave him a
méringue, and very nearly killed him! It was on the eighth of June.
This is the tenth of September; just three months and two days.”
“So it is,” he acquiesced, with forced nonchalance.
“Do you live near here?” she continued.
“About four miles, by a goat path across that hill.”
“Pray are you aware that we are picnicing below, with half
Shirani?”
“Yes, I know; but not another starvation picnic I hope?”
“And yet,” ignoring his ill-timed jest, “you have never come to see
us, and we leave to-morrow!”
He looked down to avoid her questioning eyes, and made no
answer, beyond a faint, half-strangled sigh.
“At least we are still friends,” she urged, swallowing something in
her throat.
“Yes—always; but I thought I had better remain away. The Shirani
folk would take me for a ghost, and I might upset their nerves. What
is the latest station news?”
“Our latest news is, that Mrs. Sladen is to go home at Christmas.
Miss Clover is engaged to Captain Burne, and Miss Paske to Sir
Gloster Sandilands,” she answered stiffly.
“Poor Toby! I suppose my former acquaintances believe me to be
in England—if they ever think of me at all?”
She hesitated, twisted her ring round and round, and then said—
“Your friends,” with emphasis, “know that you are out in this
country, looking after your father. How is he?”
“Wonderfully better, thank you.”
“And you—you have been ill?” she remarked rather tremulously.
“No, indeed; I never was better in my life. Of course you saw
Waring before he went down?”
“No,” with undeniable embarrassment. “In fact, he copied your
example, and dispensed with all farewells. He—he—left rather
suddenly,” and she coloured.
“Why do you hesitate?” looking at her keenly. “What did he do? He
has been doing something, I can see.”
“It was rather what he did not do,” with a constrained laugh. “Of
course it is no business of mine. He did not pay any of his bills. I am
not sure whether I ought to tell you.”
“And I am quite sure you ought,” he answered with decision.
“But he left such quantities of debts behind him, and no—address
——”
“Debts?” he repeated incredulously.
“Yes, he paid for nothing. Club accounts, card accounts, mess
bills, servants’ wages—not even his bearer’s bill for thread and
buttons and blacking. People,” with a nervous little laugh, “seem to
think that was the greatest enormity of all!”
“No!” cried Mark, his pale face turning to a vivid red, “I will tell you
of a greater. I knew he had spent and muddled away most of our
joint-funds, and the day I was last in Shirani I collected the bills and
gave him all the money I had in the world—a cheque for five hundred
pounds—to settle our affairs. He swore, on his honour, he would pay
them at once and send me the receipts. Now, of course, every one in
Shirani believes me to be as great a swindler and thief as he is! They
must naturally suppose that I—I—bolted from my creditors! I,” with
increasing warmth, “now understand why you stammered and
hesitated when I asked if I was not forgotten. Forgotten! I shall live in
people’s memories for years—on the principle that ‘the evil which
men do lives after them.’”
“I am sorry I told you——” she began eagerly.
“And I have chiefly myself to blame. I was an idiot to trust Waring. I
had had one lesson; but—I was half mad with my own troubles, and
determined to tear myself away from Shirani at once. I felt that if I
stayed on I might yield to temptation—good resolutions and fresh
impressions might fade—and I might never return here——”
The pup, flouted and evaded by the scornful lumgoors, and
exhausted by his tremendous efforts, now squatted on the path,
apparently listening open-mouthed to every word.
The grey pony had also drawn near, and occasionally rubbed his
handsome head against his master’s shoulder, as much as to say
—“Enough of such fooling; let us move on!”
“This is horrible!” continued Mark. “I hate to owe a penny, and I
have no means of paying our joint-debts, for Waring has wolfed the
cheque.”
“And your uncle?”
“He has never written once. From his point of view I have treated
him atrociously, and I am awfully sorry he should think so, for I am
very fond of him. Of course he has done with me.” And, with a grim
smile, “I am now in sober truth—a real poor relation. I am a pretty
sort of fellow,” he went on, “I have talked of nothing but myself—and
money—money—money, for the last five minutes. Tell me of
yourself. Are you having a good time?”
“A good time!” she echoed, with a flash of her dark grey eyes.
“I beg your pardon, Honor,” he said, humbly. “But it has been one
of my few consolations when I roam about these hills, to think that
you were happier than I am.”
“And had forgotten you?” she added expressively.
“And,” with a slight tremor in his voice—“had forgotten me.”
“Never!” she returned, with passionate energy.
“Yes—you will, in time; perhaps not for two or three years—for you
are not like other girls. I am your first lover—nothing can deprive me
of that memory.”
“No, nothing,” she admitted, almost in a whisper.
“But, you know, they say a woman generally marries her second
love,” with a laborious effort to speak steadily.
“How calmly you can discuss my lovers, and my future!” cried
Honor, indignantly. “Oh, how hard you have become—how cold—
how cruel!”
“Cruel—if I am cruel—only to be kind,” he replied steadily. “For,
years to come, you will thank me—and think——”
“I think,” she interrupted, with a pitiful little gesture, “that when we
meet so—seldom—scarcely ever—that you might be——” here her
voice totally failed her.
She had grown much paler, and her breath came quickly, as she
tried to keep down a sob.
Mark resisted a wild impulse to take her in his arms—and
stooping, picked up the pup instead.
“Your uncle got my letter?” he asked, in a cool formal tone.
“Yes, and was dreadfully concerned; but he said you were a man
of honour, and your views and his were identical—but—I don’t agree
with them.”
“You don’t agree with them! What do you mean?”
“He told auntie, of course—and of course I insisted on her telling
me. After all, it was my affair. I know the obstacle—I am ready to be
your wife, just the same. As for poverty——”
“Poverty,” he interrupted quickly, “is not the question! I have a little
money of my own, and I could put my shoulder to the wheel and
work for you, Honor. It is not that—it is that my future is
overshadowed, my reason stalked, by an hereditary and implacable
enemy. I have no right to drag another into the pit—and, please God,
I never will! When I lived a smooth luxurious sort of life, in those days
that seem years ago, I thirsted for some difficult task, something to
do that would single me out and set me apart from other men. My
task has been allotted to me; it is not what I desired——”
“No!” interposed Honor, whose heart was fighting against her fate
with a frenzy of despair. “Your task is to renounce everything—the
world, and friends, and wealth, and me—and to bury yourself in
these remote hills, with a crazy old gentleman who cannot realize the
sacrifice. Don’t!” with an impatient gesture of her hand, “I know that I
am speaking as if I were mad, and in my old foolish way. I know in
my heart that you are doing what is right—that you could not do
otherwise, and I—I am proud of you.”
Then, as she looked into his haggard, altered face and miserable
eyes, and caught a glimpse of the real Mark beneath his armour of
stoicism—“But, oh, it is hard—it is hard——” she added, as she
covered her face with her hands and wept.
“Honor! for God’s sake don’t—don’t—I implore you! I cannot bear
this. I would go through all I have struggled with over again to save
you one tear. Circumstances—destiny—or whatever they call it—is
too strong for us. You must not let me spoil your life. You know I shall
love you—you only as long as I draw breath.”
“I know that!” raising her wet eyes to his. “And you dare to talk to
me of a good time, of marrying my second love! Oh, Mark, Mark!
how could you?”
“I was a brute to say it. I thought it would make it easier for you—
when——” and his voice broke—“sometimes—when—you think of
me——”
“Which will be every day—and often. And now I must be going. I
was already late enough when Tommy ran away. I was afraid of his
meeting poor Ben’s fate. Will you come with me as far as the brow of
the hill, where our paths part?”
“Yes—part for ever!” he added to himself.
As they turned, she asked him many questions concerning his life,
his associates, and his occupations. He on his side made the best of
everything, painting the Yellow Bungalow, the gardens, the planters
and missionaries with gorgeous colours.
“And are there no white women near you?” she inquired. “Have
you never met one lady to speak to since you left Shirani?”
“Yes, I have one acquaintance, and one who is a friend of yours.
She is a Persian, I believe. Your little cornelian ring has been a
strong link between us. She is a most mysterious person. No one
can tell who she is, or where she came from. All we know is, that she
spends her present time in doing good, nursing the sick and dying.
She told me that you knew the history of her life—you alone——”
“It is true,” bending her head as she spoke, and fixing her eyes on
the ground.
“She shrinks from all observation, but she does not hide from me
—for your sake; we talk about you constantly, I may say always.”
“Then give her a message from me, please. Tell her that I often
think of her, and ask her if I may write to her, or if she will write to
me?”
“You forget that she is a Persian. How can she possibly write to
you?”
Honor coloured painfully, and twisted her ring round and round
before she spoke, and then she said—
“Please give her the message all the same. I—I—can manage to
get her letter read. I will understand it.”
They were now at the point where their roads diverged—his went
along the hill, hers led down into the valley. She stopped for a
moment, and caressed the grey pony’s sleek hard neck; then she
turned and gave the pony’s master both her hands. They gazed at
one another, with sad white faces, reading their life’s tragedy in each
other’s eyes. Then she suddenly tore her fingers from his clasp, and
ran down the hill with Tommy in pursuit. Jervis stood where she had
left him, until the very last echo of her footsteps had died away.
“And that is a sound I shall never hear again,” he groaned aloud,
and flinging himself down on the root of a tree, he covered his face
with his hands. How long he remained in this attitude the grey pony
alone knew! By-and-by he became tired of waiting—for he was either
too well fed or too sympathetic to graze—he came and rubbed his
soft black muzzle against the man’s short brown locks (his cap lay
on the ground). It was his poor little attempt at consolation, and
effectually roused his owner, though it did not comfort him, for what
could a dumb animal know of the great distresses of the human
heart?
Honor was late for tiffin, in fact it was getting on for afternoon
teatime when she arrived. She discovered the bungalow in a state of
unusual commotion. There was visible excitement on the servants’
faces, an air of extra importance (were that possible) in the bearer’s
barefooted strut—he now appeared to walk almost entirely on his
heels.
Mrs. Brande was seated at a writing-table, beginning and tearing
up dozens of notes; her cap was askew, her fair hair was ruffled, and
her face deeply flushed. What could have happened?
“Oh, Honor, my child, I thought you were never coming back, I
have been longing for you,” rushing at her. “But how white you look,
dearie; you have walked too far. Are you ill?”
“No, no, auntie. What is it? There is something in the air. What has
happened?”
For sole answer, Mrs. Brande cast her unexpected weight upon
her niece’s frail shoulder, and burst into loud hysterical tears.
“Only think, dear girl!”—convulsive sobs—“a coolie has just come
—and brought a letter from P.—They have made him a K.C.B.”—
boisterous sobs—“and your poor old auntie—is—a lady at last!”
CHAPTER XLIII.
“RAFFLE IT!”
“Major and Mrs. Granby Langrishe request the honour of Mr. and
Mrs. Blanks’s company at St. John’s church at two o’clock on the
afternoon of the 20th inst., to be present at the marriage of their
niece and Sir Gloster Sandilands.”
These invitation cards, richly embossed in silver, were to be seen
in almost every abode in Shirani. The wedding dress was on its way
from Madame Phelps, in Calcutta. The cake and champagne were
actually in the house. There were to be no bridesmaids, only two
little pages—“they were cheaper,” Mrs. Langrishe said to herself; “a
set of girls would be expecting jewellery and bouquets.” Happy Mrs.
Langrishe, who had been overwhelmed with letters and telegrams of
congratulations. She had indeed proved herself to be the clever
woman of the family. It was her triumph—more than Lalla’s—and she
was radiant with pride and satisfaction. Yea, her self-congratulations
were fervent. She was counting the days until her atrocious little
incubus went down the ghaut as Lady Sandilands. A little incubus,
securely fastened on another person’s shoulders—for life!
Lalla was entirely occupied with letters, trousseau, and
preparations. She was to have taken the principal part in a grand
burlesque, written specially for her, by Toby Joy. The burlesque had
been on hand for two months, and was to bring the Shirani season to
a fitting and appropriate close. The piece was called “Sinbad the
Sailor.” Lalla had been rehearsing her songs and dances most
industriously, until she had been called upon to play another part—
the part of Sir Gloster’s fiancée.
Sir Gloster did not care for burlesques; he had never seen Miss
Paske in her true element—never seen her dance. It was not
befitting her future position that she should appear on the boards.
No, no; he assured her that he was somewhat old-fashioned, his
mother would not like it. She must promise him to relinquish the idea,
and never to perform in public again. But Lalla was stubborn; she
would not yield altogether. Urged by Toby Joy, by the theatrical
troupe—who felt that they could not pull through without their own
bright particular star—she held out in a most unreasonable and
astonishing manner. At length she submitted so far as to declare that
“she would wear Turkish trousers, if he liked!” This she reluctantly
announced, as if making an enormous concession.
“He certainly did not wish her to wear Turkish trousers!” he
returned, greatly scandalized. “How could she make such a terrible
suggestion?” He was heavy and inert, but he could oppose a dead,
leaden weight of resistance to any scheme which he disliked. This
he called “manly determination;” but Lalla had another name for it
—“pig-headed obstinacy!” However, she coaxed, promised, flattered,
wept, and worked upon her infatuated lover so successfully, that he
reluctantly permitted her to take a very small part, so as not to have
her name removed from the bills; but this was to be positively “Her
last appearance,” and she might announce it on the placards, if she
so pleased. He himself was summoned to Allahabad on urgent
business—in fact, to arrange about settlements—and he would not
be present, he feared; but he would do his best to return by the end
of the week.
Miss Paske’s part, the dancing, singing peri, was given to a very
inferior performer—who was the stage manager’s despair, and a
most hopeless stick. Toby Joy, who was in woefully low spirits
respecting the certain failure of the burlesque, and—other matters—
came to Lalla on the night but one before the play.
“She has got influenza—so it’s all up,” making a feint of tearing his
hair, “and every place in the house sold for two nights, and—an
awful bill for dresses and properties. What is to become of me? Can’t
you take it? It was your own part—you do it splendidly—no
professional could beat you. Come, Lalla!”
“I promised I would not dance,” she answered with a solemn face.
“Time enough to tie yourself up with promises after you are
married! Take your fling now—you have only ten days—you’ll never
dance again.”
“No, never,” she groaned.
“He is away, too,” urged this wicked youth; “he is not coming up till
Saturday; he won’t know, till all is over, and then he will be as proud
as a peacock. You have your dresses, you had everything ready until
he came and spoilt the whole ‘box of tricks.’” And Toby looked
unutterable things. “Did he say anything to your aunt?” he asked.
“No—not a word. You don’t suppose that I allow her to mix herself
up in my affairs? It was merely between him and me——”
“Well, you can easily smooth him down—and if you don’t take your
own original part, I must send round a peon this afternoon, to say
that the burlesque has been put off, owing to the illness of the prima-
donna—the ‘incapability’ is the proper word. But you are a brick, and
you won’t let it come to that; you will never leave us in a hole.”
A little dancing devil in each eye eagerly assured him that she
would not fail them! Yes, the combined entreaties of her own set—
their compliments and flattery—her own hungry craving for what
Toby called “one last fling,” carried the point. He would not be back
until Saturday. The piece was for Wednesday, Thursday, and Friday,
and she could (as she believed) easily talk him over. Yes, she made
up her mind that she would play the peri; and she informed her aunt,
with her most off-hand air, “that she had been prevailed on to take
the principal part; that Miss Lane was ill (and any way would have
been a dead failure); that she could not be so shamefully selfish as
to disappoint every one; that the proceeds were for a charity (after
the bills were paid there would not be much margin)”, and Mrs.
Langrishe, in sublime ignorance of Lalla’s promise, acquiesced as
usual. She now subscribed to all her niece’s suggestions with
surprising amiability, assuring herself that the days of her
deliverance from “a girl in a thousand” were close at hand!
The burlesque of Sinbad was beautifully staged, capitally acted,
and a complete success. Miss Paske’s dancing and singing were
pronounced to be worthy of a London theatre—if not of a music-hall.
People discussed her wherever they met, and all the men hastened,
as it were in a body, to book places for the next performance.
The ladies were not altogether so enthusiastic; indeed, some of
them were heard to wonder how Sir Gloster would have liked it?
Sir Gloster, on the wings of love, was already half way through his
return journey. He had transacted his business with unexpected
promptitude, and was breakfasting at a certain dâk bungalow,
encompassed with many parcels and boxes. Here he was joined by
two subalterns, who were hurrying in the opposite direction—that is,
from Shirani to the plains. They were full of the last evening’s
entertainment, and could talk of nothing but the burlesque.
“It was quite A1,” they assured their fellow-traveller. “It could not
be beaten in London—no, not even at the Empire. Miss Paske was
simply ripping!”
“Yes,” returned Sir Gloster, complacently, “I believe there is a good
deal of nice feeling in her acting, but she had only a minor part.”
“Bless your simple, innocent heart!” exclaimed the other, “she was
the principal figure; she was the whole show; she filled the bill.”
“May I ask what you mean?” demanded the baronet, with solemn
white dignity.
“She was the peri—didn’t you know? She dances every bit as well
as Lottie Collins or Sylvia Grey, doesn’t she, Capel?” appealing
eagerly to his comrade.
“Yes; and I’d have gone to see her again to-night, only for this
beastly court-martial. I gave my ticket over to Manders, for he
couldn’t get a place. She draws like a chimney on fire; there is no
squeezing in at the door—even window-sills were at a premium. You
ought to go on, Sir Gloster; of course you will get a seat,” with a
significant laugh. “This is the last performance, and, upon my word,
you should not miss it.”
Sir Gloster remained mute. Was it possible that his little Lalla, who
wrote him such sweet, endearing notes, had deliberately broken her
word, and defied him?
At the very thought of such a crime his white flabby face grew
rigid. Seeing was believing. He would take this crack-brained young
man’s advice, and hurry on. He might manage to be in Shirani by
eight o’clock that evening—just in time to dress and get to the play.
His wrath was hot within him—and the anger of a quiet and
lethargic person, when once roused, is a very deadly thing. His
sturdy hill ponies bore the first brunt of his indignation; and Sir
Gloster, who was naturally a timid horseman, for once threw fear to
the winds, and galloped as recklessly as Toby Joy himself. He
arrived at the club just in time to swallow a few mouthfuls, change
his clothes, and set off to the theatre. He could not get a seat, but
“he might, if he liked, stand near the door, with his back to the wall,”
and for this handsome privilege he paid four rupees—the best-laid-
out money he ever invested, as he subsequently declared. The
curtain had already risen; the scene looked marvellously like
fairyland. Toby Joy had just concluded a capital topical song, when a
large egg was carefully rolled upon the stage. The egg-shell opened
without the application of a spoon, and hatched out a most exquisite
creature, the peri, whose appearance was the signal for a thunder of
hand-clapping. The peri—yes—was Lalla, in very short, fleecy
petticoats, with a twinkling star in her hair—his own present, as Sir
Gloster noted with an additional spasm of indignation.
Presently she began to dance.
Now, be it known, that her performance was perfectly decorous
and delightfully graceful. Lalla’s glancing feet scarcely touched the
ground, and she danced as if from pure happiness and lightness of
heart. (Toby Joy danced as if he had le diable au corps.) After
entrancing the spectators for ten thrilling minutes with several
entirely fresh variations, Lalla finished up with the tee-to-tum spin,
which is to the dancer what the high note, at the end of a song, is to
the singer!
The result of this effort was a hurricane of frantic applause, in
which Sir Gloster took no part; he was not a theatre-goer—he was
provincial. His mother and his surroundings were strictly evangelical;
and whilst his fiancée enchanted the whole station, he stood against
the wall glowering and pale. The only character present to his mind
was the daughter of Herodias! Frankly speaking, the performance
had filled him with horror. That the future Lady Sandilands should
offer herself thus to public contemplation; that any one who chose to
pay four rupees might see this indecorous exhibition—including
soldiers in uniform, at the low price of four annas!
He was actually beside himself with fury, and forced his way out,
with his head down, like a charging animal. Few noticed him or his
hasty exit; every one had eyes for Lalla, and Lalla only. She received
an ovation and a shower of bouquets as she was conducted before
the curtain by Toby Joy, modestly curtseying and kissing her hand.
Miss Paske subsequently remained to enjoy a merry and recherché
supper, chaperoned by the invaluable Mrs. Dashwood; and Mrs.
Langrishe, as was not an unusual occurrence, went home alone.
To that lady’s great amazement, she discovered Sir Gloster
awaiting her in the drawing-room, and she gathered from his strange
and agitated appearance that something terrible had occurred.
“I was thinking of writing to you, Mrs. Langrishe,” he began in a
curiously formal voice, “but I changed my mind, and came to see you
instead. All is over between your niece and myself.”
Mrs. Langrishe turned perfectly livid, and dropped into the nearest
chair.
“Pray, explain!” she faltered at last.
“Miss Paske will doubtless explain to you why she gave me a
solemn promise to renounce dancing on a public stage. I reluctantly
allowed her to appear for the last time in a very small part—that of
an old nurse. I return unexpectedly, and discover her in the character
of a ballet-girl, exhibiting herself—well, I must say it—half naked to
the whole of Shirani. Such a person is not fit to be my wife. She has
broken her word. She has a depraved taste; she has no modesty.”
That Ida Langrishe should live to hear such epithets applied to her
own flesh and blood!

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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:

A powerful and determined temptation, that was deaf to reason or

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