Question 1

In the principal-agent relationship, the agent is

Accepted Answer

In the principal-agent relationship, the agent is 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. This means that the agent is acting on behalf of the principal, who owns the resources, and is responsible for ensuring that the agent acts in the best interests of the principal. The agent is therefore accountable to the principal for his or her actions, and may be required to compensate the principal for any losses that result from his or her actions.

Question 2

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.
-Refer to Figure 7-1. The efficient equilibrium quantity is ________ thousand vaccinations.

Accepted Answer

The efficient equilibrium occurs where the marginal social benefit (MSB) equals the marginal cost (MC), which is at a quantity of 300 thousand vaccinations. This is because the MSB takes into account the positive externalities or benefits to society, which the marginal private benefit (MPB) does not consider. At a quantity of 300 vaccinations, the MPB is only 200, which is lower than the MSB of 400, indicating that society as a whole benefits from an increased quantity of vaccinations beyond what individuals may choose for themselves. Therefore, the efficient quantity is higher than the quantity that would occur based on individual decisions alone, and the best choice is C.

Question 3

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

Accepted Answer

The answer of If a doctor knows that an insurance...

Question 4

Health insurance companies impose deductibles on policies and co-payments on claims

Accepted Answer

Health insurance companies impose deductibles and co-payments on policies and claims to reduce moral hazard problems. Moral hazard refers to the situation where individuals are more likely to take risks or behave in a certain way when they are insured than when they are not. This can lead to increased utilization and higher costs, which can ultimately raise premiums. By requiring individuals to pay out of pocket for certain services, deductibles and co-payments can help to reduce moral hazard by making individuals more cost-conscious and encouraging them to only use healthcare services when truly necessary.

Question 5

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.
-Refer to Figure 7-1. Marginal private benefit is represented by which curve?

Accepted Answer

The marginal private benefit is typically represented by the demand curve, which in this case is D₁.

Question 6

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

Accepted Answer

The efficient equilibrium price is where the marginal social benefit (MSB) intersects with the supply curve, which is at a price of $25. At this price, the quantity demanded is 4 million vaccinations, which is also the socially optimal quantity. A price lower than $25 would lead to a shortage in vaccinations, while a price higher than $25 would result in a surplus and waste of resources. Therefore, the best choice is B as it represents the efficient equilibrium price.

Question 7

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

Accepted Answer

The answer of Figure 7-1  Figure 7-1 represents the...

Question 8

What is the principal-agent problem?

Accepted Answer

The principal-agent problem refers to the conflict of interest that arises when an agent, hired to act on behalf of a principal, pursues their own interests rather than the interests of the principal. This could be due to information asymmetry, lack of trust, or misaligned incentives.

Question 9

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?

Accepted Answer

Reducing the chances that the person vaccinated will catch the disease is a private benefit because it directly benefits the individual who receives the vaccination, while reducing the probability of an influenza epidemic is a social benefit because it benefits the population as a whole. Therefore, the correct statement is C. Choice A is incorrect because reducing the probability of an influenza epidemic is a social benefit, not a private cost. Choice B is incorrect because, as stated in the explanation for Choice C, there are social benefits to vaccinating people against communicable diseases. Choice D cannot be determined from the given information as it does not provide any cost-benefit analysis.

Question 10

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.
-Refer to Figure 7-1. The market equilibrium quantity is ________ thousand vaccinations.

Accepted Answer

The answer of Figure 7-1  Figure 7-1 represents the...

Question 11

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?

Accepted Answer

Plan II is likely to draw participants who expect high medical costs as they would prefer low deductibles, which may result in adverse selection as healthy individuals who do not expect to consume much health care services will not be willing to pay the high premiums. This can result in insurance companies paying out more claims than the premiums they collect.

Question 12

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

Accepted Answer

Moral hazard refers to the situation when an insured person may engage in reckless behavior or take less care to avoid losses, knowing that the insurer will cover the damages. This results in higher costs for insurance companies and can lead to higher premiums for all customers. Asymmetric information, adverse selection, and market signaling are also issues that affect the automobile insurance market, but moral hazard best describes the specific problem mentioned in the scenario.

Question 13

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.
-Refer to Figure 7-1. Marginal social benefit is represented by which curve?

Accepted Answer

The answer of Figure 7-1  Figure 7-1 represents the...

Question 14

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.
-Refer to Figure 7-1. At the market equilibrium, the deadweight loss is equal to

Accepted Answer

The deadweight loss is the triangle between the marginal private benefit (MPB) and marginal social benefit (MSB) curves, from the equilibrium quantity to the socially optimal quantity. In this case, the socially optimal quantity is where the MSB intersects the marginal cost curve, at a quantity of 10,000 vaccinations. The equilibrium quantity, where MPB intersects marginal cost, is 30,000 vaccinations. The deadweight loss triangle has a base of 20,000 vaccinations (30,000 - 10,000) and a height of $25 per vaccination ($50 - $25). So the deadweight loss is (1/2)*(20,000)*(25) = $500,000.

Question 15

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.
-Refer to Figure 7-1. At the efficient equilibrium

Accepted Answer

At the efficient equilibrium, marginal social benefit (MSB) equals marginal cost (MC), resulting in the optimal quantity of vaccinations being produced and consumed. This maximizes economic surplus, which is the difference between total benefits and total costs. Therefore, the correct choice is A.

Question 16

What is moral hazard?

Accepted Answer

The answer of What is moral hazard?
...

Question 17

Because of the positive externality of vaccinations, economic efficiency would be improved

Accepted Answer

The positive externality of vaccinations means that when one person gets vaccinated, it not only protects them from the disease but also helps to protect others who may come in contact with the vaccinated individual. Therefore, the more people who are vaccinated, the greater the benefits to society as a whole. This is why economic efficiency would be improved if more people were vaccinated. The other options, such as fewer people being vaccinated or no people being vaccinated, would not only harm individuals but also hurt the economy as a whole due to increased healthcare costs and decreased productivity.

Question 18

If a fire insurance company requires firms buying fire insurance to install automatic sprinkler systems, the insurance company is trying to reduce

Accepted Answer

The requirement to install automatic sprinkler systems is aimed at reducing the moral hazard problem, which arises when individuals or firms take on more risk because they know they are insured. By requiring the installation of sprinkler systems, the insurance company is reducing the likelihood of a fire occurring and the potential damage, thereby reducing the chance that the insured will be careless with fire prevention measures.

Question 19

In markets with asymmetric information

Accepted Answer

Asymmetric information is the primary cause in markets with asymmetric information, and it leads to adverse selection where the more informed party makes decisions based on their advantage, leaving the less informed party with poor outcomes. Adverse selection, in turn, leads to moral hazard, where the less informed party takes risks or behaves differently because they know the more informed party will bear the consequences.

Question 20

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.
-Refer to Figure 7-1. The market equilibrium price is

Accepted Answer

The answer of Figure 7-1  Figure 7-1 represents the...

Quiz 7: The Economics of Health Care

In the principal-agent relationship, the agent is

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

Health insurance companies impose deductibles on policies and co-payments on claims

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. -Refer to Figure 7-1. Marginal private benefit is represented by which curve?

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

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

What is the principal-agent problem?

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?

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

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. -Refer to Figure 7-1. Marginal social benefit is represented by which curve?

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. -Refer to Figure 7-1. At the market equilibrium, the deadweight loss is equal to

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. -Refer to Figure 7-1. At the efficient equilibrium

What is moral hazard?

Because of the positive externality of vaccinations, economic efficiency would be improved

If a fire insurance company requires firms buying fire insurance to install automatic sprinkler systems, the insurance company is trying to reduce

In markets with asymmetric information

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. -Refer to Figure 7-1. The market equilibrium price is