This Document Contains Chapters 6 to 10 Chapter 6 Political Economy Multiple Choice 1. Majority rule voting A) requires a simple majority greater than half the voters. B) requires that rules of order be established. C) does not occur in democracies. D) can only be applied to single issues. Answer: A 2. With multiple-peaked preferences, A) a unique political equilibrium does not exist. B) all individuals have a point that is most preferred. C) the law of transitivity is violated. D) all of the above. Answer: D 3. Logrolling is A) a system used often at lumberjack contests. B) a system that will always lead to worthy projects getting funded. C) a system that involves the trading of votes. D) a system that generally involves double-peaked preferences. Answer: C 4. Rent seeking involves A) finding reasonable rent rates. B) price floors. C) price ceilings. D) citizen groups lobbying elected officials to manipulate government policy. Answer: D 5. Special interest groups are established on the basis of A) sources of labor. B) size of income. C) sources of income. D) region. E) all of the above. Answer: E 6. When each individual has consistent preferences, but those of the community are not consistent, it is known as A) agenda manipulation. B) majority rule. C) voting paradox. D) logrolling. Answer: C 7. In a representative democracy, there are A) elected politicians. B) public employees. C) special interests. D) all of the above. Answer: D 8. A person prefers large and small levels of national defense to medium-sized levels of national defense. This person A) is violating the law of transitivity. B) has single-peaked preferences. C) has multiple-peaked preferences. D) cannot achieve his or her most-preferred outcome. Answer: C 9. It is stated that, in democracy, every vote counts. To be a contentious voter in a democracy, one should A) spend some time learning about the issues. B) find out about the positions of the candidates. C) be sure to vote. D) do all of the above. Answer: D 10. Political parties A) have a large influence on setting the political agenda of candidates. B) are only concerned with market efficiency. C) have primaries that influence the party platform. D) a and b. E) a and c. Answer: E 11. Voter fraud A) can have a detrimental effect on the political process. B) is easily detected. C) is defined as trading votes to pass certain political agenda items. D) is more likely to occur in dictatorial political frameworks. Answer: A 12. Government bureaucrats want larger budgets A) because salaries are sometimes tied to budget size. B) to fulfill an “empire building” tendency. C) because it may be necessary to ensure marginal benefits of output equal marginal costs. D) because of all of the above. Answer: D 13. Lindahl prices A) result in efficient levels of public goods provision. B) require honest revelation of preferences. C) result in different prices for the same amount of output. D) cause all of the above. E) cause none of the above. Answer: D 14. Government growth has been caused by A) citizens who want larger government. B) lots of public lands available in the West. C) increases in privatization. D) inflation. Answer: A 15. Which of the following is an example of a special-interest group? A) Democratic party B) Bureau of Alcohol, Tobacco, and Firearms C) National Rifle Association D) Association of State Legislators E) all of the above Answer: C 16. The Economic Stimulus Act of 2008 offered A) zero pay-as-you go offsets. B) varying pay-as-you go offsets. C) formula driven pay-as-you go offsets. D) none of the above. Answer: A 17. In 2007 which country had the highest ratio of government expenditures to GDP? A) Canada B) Switzerland C) United States D) none of the above Answer: A 18. A deadweight loss is never A) found when people are still living. B) found when marginal benefits equal marginal costs. C) found in open economies. D) allowed in the US. Answer: B True/False 19. The possibility of multiple-peaked preferences cannot be ruled out. A) True B) False C) Uncertain Answer: A 20. Applying economic principles to the analysis of political decision making is political economy. A) True B) False C) Uncertain Answer: A 21. Governments grow because low income individuals cannot use the political process to redistribute income towards themselves. A) True B) False C) Uncertain Answer: B 22. The median voter must have preferences that reflect those of all people in the community. A) True B) False C) Uncertain Answer: B 23. Elected officials never care about the wishes of the voting public and govern using their own value system. A) True B) False C) Uncertain Answer: C 24. Special interest groups are a determent to the political process. A) True B) False C) Uncertain Answer: B 25. Under certain assumptions, the actions of elected officials mimic the wishes of the median voter. A) True B) False C) Uncertain Answer: A 26. Arrow’s impossibility theorem is not relevant to modern analysis of political economy. A) True B) False C) Uncertain Answer: B 27. The Marxist view would say that there is an overproduction of goods by the private sector. A) True B) False C) Uncertain Answer: A 28. In William Niskanen’s model of bureaucracy, the efficient level of government output is greater than the actual level of output. A) True B) False C) Uncertain Answer: B 29. Government is inherently bad. A) True B) False C) Uncertain Answer: B 30. Most economists – both liberals and conservatives – believe a balanced budget amendment is an ill-conceived idea. A) True B) False C) Uncertain Answer: A Essay 31. Consider the following net benefits (measured in billions of dollars) that will result from the passage of two legislative bills, X and Y: (a) Identify the logrolling opportunity present in this situation. (b) Identify the potential gains to voters. (c) Explain why logrolling is efficiency enhancing. Answer: (a) On their own, neither issue X nor Y will pass. Both will be voted down by votes of 2-1. If person A trades a vote with B, then both issues will pass by 2-1 votes. (b) With both issues passed, overall utility for person A is 3. For person B, overall utility is 4. For person C, overall utility is –5. (c) With issue X passed, society is benefited because it had a total benefit to society of 3. Logrolling also allowed issue Y to pass, though it shouldn’t have since its total benefit to society is –1. 32. Suppose there were three candidates running for office: Dewey, Cheatum, and Howe. Suppose a majority of voters preferred Cheatum to Dewey. Does this mean that a majority of voters preferred Howe to Dewey? Answer: Suppose there are three voters. The following example illustrates the counter-example. Each voter ranks the candidates in order of preference. Cheatum beats Dewey, but Dewey beats Howe. 33. Suppose that you have two people in an economy, Ms. Hundley and Mr. McKenna, who want to produce a public good S. Suppose we calculate the Lindahl equilibrium using the method in your textbook. In this case, the demand curve for Ms. Hundley is S=P1/2. The demand curve for Mr. McKenna is S=8/P. If the marginal social cost of the project is 10, what is the Lindahl equilibrium quantity of S? What are the Lindahl prices? Answer: Set P1/2 = 8/P. Multiply both sides by P, leaving P3/2 = 8. Therefore, P = 82/3 = 4. At P = 4, S* = 2. Mr. McKenna pays 4. Ms. Hundley pays 6. 34. Consider Figure 6.5 in your textbook. If the equation for the demand curve were P = 10 – Q and MC constant at 4, (a) Find the competitive level of output and price. (b) Find the marginal revenue and derive the rent seeking cartel’s of output and price. (c) How much rent is being raised? Answer: (a) Set Demand = Supply, 10 – Q = 4, then Q* = 6 and P* = 4 (b) TR = P*Q = (10 – Q) * Q, MR = dTR/dQ = 10 -2Q, then set MR = MC, 10 -2Q = 4, Qc = 3 and Pc = 7 (c) Total rent = (Pc - P*) x Qc = 3 x 3 = 9. 35. In Figure 6.4 in your textbook, there is an illustration of Niskanen’s model of bureaucracy. Suppose housing costs are measured by the function C = Q2. Suppose further that value is measured by V = Q1/2. What is the actual level of output in this case? Answer: Set Q2 = Q1/2. Q* = 1. 36. What should be the priority of politicians? Should they be mainly concerned with conveying and voting the wishes of the people that they represent? Should they be mainly concerned with standing for positions that they feel strongly about? Should they be mainly concerned with securing re-election? Answer: All three issues are valid and must be dealt with in conjunction. The people that elected them as representatives expect to have their voices heard in a democracy. In addition, the people who elect a politician have to be able to trust their representatives’ judgment on some issues. A politician not in office can have no impact, so re-election has to be a concern. 37. Special interest groups are not always perceived to add a positive to society. Discuss why this is so. Answer: Often small groups of people form groups that have political influence that are borne out by majority of society when the majority of society does not receive the benefits of the legislated action. This can cause resentment and sometimes lead to economically inefficient levels of production. 38. In the presidential election of 2008 , record numbers of people vote in national, state, and local elections. This phenomenon was even more pronounced among young voters. What are possible explanations for this? Answer: Increasingly, young people felt disaffected by the political process and did not feel that their votes or voices actually mattered. Voters have become more aware of the issues and, therefore, more inclined to participate in the political process. Chapter 7 Education Multiple Choice 1. Vouchers allow students to A) get free lunches at public schools. B) go to public schools at reduced rates. C) receive discounts on school supplies like pens and paper. D) all of the above E) none of the above Answer: E 2. _________ is the investment that individuals make in education, training, and health care that raise their productive capacity. A) Capital market B) Human capital C) Human engineering D) Private good production Answer: B 3. In 2007 ___________ had the highest annual expenditures on public and private schools per student. A) Spain B) France C) United States D) Japan Answer: C 4. Publicly provided education is generally considered A) a public good that generates positive externalities. B) not to be a public good that generates negative externalities. C) not to be a public good that generates positive externalities. D) a public good that generates negative externalities. Answer: C 5. Reducing class size will A) improve student test scores. B) decrease student test scores. C) have no impact on student test scores. D) have an undetermined impact on test scores. Answer: D 6. Charter schools A) are public schools. B) operate under special state government charters. C) can experiment with a variety of approaches to education. D) have some independence in making spending and hiring decisions. E) all of the above. Answer: E 7. Merit pay for teachers has a _________ on test student test scores. A) positive B) negative C) undetermined D) none of the above Answer: C 8. Public provision of education might A) cause property values to fall. B) crowd out private provision. C) decrease local taxes. D) none of the above. Answer: B 9. Between 2003 and 2004 real annual expenditure per pupil in public elementary and secondary schools A) increased by $102. B) decreased by $701. C) did not change. D) increased by $701. Answer: A 10. The presence of positive externalities _____ justify the current structure of government programs for higher education. A) should B) does C) should not D) does not. Answer: D 11. Some critics have argued that moving children to private schools might reduce the _________ of education. A) pure public goods aspect B) positive externalities C) size of library holdings D) size of teachers unions influence Answer: B 12. The federal government subsidizes higher education A) less than primary and secondary education. B) more than primary and secondary education. C) about the same as primary and secondary education. D) because it does not subsidize primary and secondary education. Answer: A 13. Since the 1960s, SAT scores have been A) falling. B) rising. C) stayed the same. D) none of the above. Answer: A 14. Government subsidies for education are motivated by A) concerns over disease. B) concerns over creating jobs for teachers. C) concerns over equity. D) concerns over choice. Answer: C 15. Under school voucher systems, financial support goes to A) to the school. B) to the state. C) to the city. D) to the family. Answer: D 16. Standardized tests are used in efforts to A) save on paper waste. B) make schools more accountable. C) give teachers more time off. D) shorten school hours. Answer: B True/False 17. Education is one of the few areas of study in your text that do not require the use of public finance. A) True B) False C) Uncertain Answer: B 18. Commodity egalitarianism suggests that some goods be available to everyone. A) True B) False C) Uncertain Answer: A 19. Human capital is increased when an firm makes investments that raise workers productivity. A) True B) False C) Uncertain Answer: C 20. Crowding out occurs when public provision of a good substitutes for private provision. A) True B) False C) Uncertain Answer: A 21. There is no correlation between more years of schooling and increased earnings. A) True B) False C) Uncertain Answer: B 22. A criticism of market-oriented schemes say that consumers may not be well informed. A) True B) False C) Uncertain Answer: A 23. Loans are better than grants for higher education. A) True B) False C) Uncertain Answer: C 24. Standardized tests are used in efforts to make schools more accountable. A) True B) False C) Uncertain Answer: A 25. All students should go on to college. A) True B) False C) Uncertain Answer: C 26. In Figure 7.1, Panel B shows free public schooling leading to less education. A) True B) False C) Uncertain Answer: B Essay 27. Assume that the budget constraint in Figure 7.1 panel A is: PEE + PAA = I, where I is total income and PE is the price of education and PA is the price of all other goods. If U(E,A) = A + E, PE = 2, PA = 1, and I = 10 what is the quantity of education and all other goods consumed? Answer: This is a corner solution where the consumer will have all of one good and none of the other. In this case she wants 5 units of education and nothing else. 28. Refer to Question 1 above. If the price of education drops to 1, how much of the two goods are consumed now? Answer: Just as in question 1 but now she is indifferent between any combination of education and all other goods that are on her budget constraint. 29. Refer to Table 7.1 in your text. By what percentage does real annual expenditures in public elementary and secondary schools rise between 1980 and 1985? Between 1995 and 2000? What can be said about the rate of change? Answer: Between 1980 and 1985 expenditures increased by 20.75%. Between 1995 and 2000, expenditures rose by 10.2%. It is clear that real spending on education has fallen dramatically. 30. Standardized tests do not receive universal acceptance as being helpful in making schools more accountable. Discuss why. Answer: Fears of schools “teaching to the test” and racial bias in test outcomes have led to questions about the effectiveness of this method. 31. Increasing the amount of annual per pupil expenditures has helped in increasing student performance. What could make that improvement better? Answer: Answers will vary, but efficiency of dollars spent along with greater accounting of funds spent will help. Increasing the efficiency of how those expenditures are used could amplify the improvement in student performance. 32. Does increasing reliance on student loans distort students’ career choices? Answer: Some argue that students who acquire large amounts of debt in college will seek employment options that allow them to pay back loans. If students fail to enter college because the costs are prohibitively high, the problem is solved but society is not welfare enhanced. 33. Do you believe that class size reductions will help student performance? Answer: Answers will vary, but should mention that the empirical evidence has been mixed in this regard. Reducing class sizes can potentially benefit student performance, as it allows for more personalized attention and interaction between teachers and students. However, the extent of this benefit can vary depending on other factors like teaching quality and resources available to educators. Chapter 8 Cost-Benefit Analysis Multiple Choice 1. Cost-benefit analysis is A) a set of practical procedures for guiding public expenditure decisions. B) used by the private sector to determine whether certain projects should be undertaken. C) difficult when benefits and costs are hard to evaluate. D) mindful of changes over time. E) all of the above. Answer: E 2. The rate at which future money must be discounted is known as the A) rate of inflation. B) exposure rate. C) discount rate. D) time rate. Answer: C 3. The value of a human life A) can be estimated by potential future earnings. B) can be subjected to cost-benefit analysis. C) is an intangible that is hard to price. D) is all of the above. Answer: D 4. The value that society places on consumption that is sacrificed in the present is called A) social marginal costs. B) social marginal damages. C) social rate of discount. D) social returns. Answer: C 5. Risk is _________ a part of cost-benefit analysis. A) never B) always C) unable to be calculated D) decided by others whether to be Answer: B 6. Money values indexed to a given period are known as A) nominal. B) real. C) inverse. D) random. Answer: B 7. The government’s decision to reduce the number of accidental deaths in the home by 100,000 A) would be very easy to do. B) was tried before but found to be too cumbersome to be handled at the federal level. C) could be accomplished using several methods that need to be evaluated for costs. D) was never a good idea. Answer: C 8. The term “future value” A) can be determined by inverting the formula for present value. B) is not used in modern public finance analysis. C) refers to the present value of future money. D) includes the shadow prices of all goods used in a project. Answer: A 9. For certain intangibles that cannot be measured, it is best to A) guess. B) exclude them from cost benefit analysis, and then calculate how large they must be to reverse the decision. C) reevaluate using the Hicks-Kaldor criterion. D) leave it to the private sector to decide on value. Answer: B 10. The chain-reaction game A) was cancelled on network TV. B) counts secondary benefits without counting secondary costs. C) compounds a bad decision by making more bad decisions, causing unwanted projects to get funded. D) is double counting of benefits. Answer: B 11. For a government to be efficient, a project should be funded up to A) MB = 0. B) MB = . C) MC = 0. D) MC = . E) MB = MC. Answer: E 12. Government budgets are A) always adhered to. B) not necessary. C) guides for project analysis. D) easy to create. Answer: C 13. Inflation favors A) lenders. B) borrowers. C) neither borrowers nor lenders. D) both borrowers and lenders. Answer: B 14. Benefits of a project A) can change over time. B) can be difficult to measure. C) should be larger than costs. D) are sometimes intangible. E) are all of the above. Answer: E 15. When wages are viewed as benefits instead of costs of a project, it is an example of the A) labor game. B) chain-reaction game. C) double-counting game. D) dating game. Answer: A 16. Internal rate of return analysis suggest that a project should be undertaken if A) NPV > 0. B) MB > 0. C) IRR > discount rate. D) discount rate > inflation rate. Answer: C True/False 17. Real dollar amounts are essentially the same as nominal dollars. A) True B) False C) Uncertain Answer: B 18. When the benefit-cost ratio of a project is greater than 1, the project should be considered. A) True B) False C) Uncertain Answer: A 19. The term “present value” refers to the future value of present day money. A) True B) False C) Uncertain Answer: B 20. In cost-benefit analysis, there is no problem created by inflation. A) True B) False C) Uncertain Answer: B 21. Refer to Figure 8.1 in your textbook. If the supply curve returns to its initial level of Sa, the amount of consumer surplus will return to its original level. A) True B) False. C) Uncertain Answer: A 22. One of the steps in cost-benefit analysis is distinguishing time frames. A) True B) False C) Uncertain Answer: A 23. Cost-benefit analysis is a relatively new tool developed and used first by NASA. A) True B) False C) Uncertain Answer: B 24. The internal rate of return is likely to lead to incorrect decisions. A) True B) False C) Uncertain Answer: A 25. Costs should always be evaluated before determining benefits. A) True B) False C) Uncertain Answer: B 26. The U.S. government uses discount rates that lead to consistent outcomes. A) True B) False C) Uncertain Answer: B 27. Unlike other methods, present value analysis indicates that a project should be undertaken if the NPV is greater than zero regardless the income distribution. A) True B) False C) Uncertain Answer: A Essay 28. The government has hired you to advise them on the merits of a project that is being proposed. The project is expected to generate benefits of 14 million dollars today, 5 million dollars in one year from today, and 1 million dollars in two years from today. (These are the only years of concern.) The project costs nothing today, but will cost 20 million dollars in two years. Assume the interest rate is 10%. If the benefit-cost ratio is greater than 1, the project should be allowed. What is your policy suggestion? Answer: Benefit stream is 5M/1.11 + 1M/1.12 = 5371900.826. Cost stream is 20M/1.12 = 16528925.62. Therefore, B/C = 5371900.826/16528925.62 > 1. Project should be funded. 29. If the interest rate is 5 percent, what is the present value of $5,000 five years from now? Answer: PV = 5,000/(1.05)5 = 3,917.63 30. What is the interest rate that should be used to ensure a total balance of $3,000 two years from now if you have a starting balance of $2,000? Answer: The rate should be 22.4744%. 31. Refer to Figure 8.1 in your textbook. If the demand curve can be characterized by the equation Q = 10 – P, how much increase in consumer surplus will occur when the price of avocados falls from $2.89 to $1.35? Answer: The original consumer surplus with 2.89 price is (1/2)*(7.11)*(7.11) = 25.28. The new consumer surplus with 1.35 price is (1/2)*(8.65)*(8.65) = 37.41. Consumer surplus increases by 37.41 – 25.28 = 12.13. 32. Consider two projects. The first project pays benefits of $90 today and nothing else. The second project pays nothing today, nothing one year from now, but $100 two years from now. Which project would be preferred if the discount rate were 0%? What if the rate increased to 10%? Answer: For a discount rate of 0%, the present value calculations would be $90 for project one and $100 for project two; therefore, project two is preferred. At a rate of 10%, the PV of project one is still $90. For project two, the PV is now 82.6; therefore, project one is preferred. 33. Some analysts have argued that cost-benefit analysis does not take into account issues involving equity and is nothing more than an efficiency test. Do you agree with this statement? Answer: The use of cost analysis can be designed to handle issues of equity. Generally, these inputs need to be included in the model by making some assumptions about welfare gains and losses. 34. Some people prefer more risky projects than less risky projects. But some people prefer less risky projects to those that are more risky. What explains this behavior? Answer: This behavior is explained through preferences. Those persons who prefer the risky gamble to the sure thing are referred to as risk lovers. Those who prefer the sure thing are risk adverse. In some analysis, the key is to set up payoffs to make a person indifferent between taking the risk or not. 35. Why is it that projects that have negative net present values are sometimes undertaken? Answer: Sometimes the influence of special interests or other factors cloud the judgment of decision makers. Often the case arises where the analysis was a victim of faulty calculations of inputs or outputs. For example, there might be double counting or other problems. Chapter 9 The Health Care Market Multiple Choice 1. When the average buyer of an insurance policy is likely to have higher risk than others in his class, this is known as A) adverse selection. B) moral hazard. C) asymmetric information. D) an HMO. Answer: A 2. In 2007, the percentage of health care expenditures paid out-of-pocket was A) 6.9. B) 8.3. C) 12. D) 1.5. Answer: C 3. Paying money in order to guarantee a certain level of compensation should an adverse event occur is A) risk aversion. B) risk smoothing. C) risk pooling. D) risk rating. Answer: B 4. The current percentage of Americans over the age of 65 is A) 18.2%. B) 19.0%. C) 12.6%. D) 10.5%. Answer: C 5. Health care markets may be inefficient because of A) poor information. B) adverse selection. C) moral hazard. D) all of the above. Answer: D 6. A third-party payment is A) made by three people. B) a payment that requires three signatures. C) is made by someone other than the consumer. D) is not used in the US health system. Answer: C 7. The government can address __________ by providing universal health insurance coverage and charging uniform premiums. A) expected utility B) asymmetric information C) commodity egalitarianism D) adverse selection Answer: D 8. Marginal benefit and marginal cost must _______ to avoid a deadweight loss. A) equal B) never equal C) decrease at an increasing rate D) increase at an increasing rate Answer: A 9. Most private insurance is provided by A) employers as a benefit to their employees. B) the federal government. C) HMOs. D) the Office of Health Insurance. Answer: A 10. When people behave in ways that involve increased risk because they have insurance, this is known as A) adverse selection. B) moral hazard. C) asymmetric information. D) a HMO. Answer: B 11. What percentage of African Americans are uninsured? A) 80 B) 3 C) 37 D) 21 Answer: D 12. Expected values A) are calculated as the average value. B) are calculated over all possible outcomes. C) are weighted by the probability of an even occurring. D) all of the above. Answer: D 13. Which one of these conditions is not a part of asymmetric information? A) parties are engaged in and economic transaction. B) information is not uniform. C) the government usually intercedes to fix the problem. D) all of the above. Answer: C 14. Pooling individuals allow insurance companies to _______ risk from a societal point of view. A) increase B) decrease C) do nothing regarding D) none of the above Answer: B 15. Which country had the highest per capita expenditures on health care in 2004? A) Australia B) Japan C) Norway D) United States Answer: D True/False 16. People will take better care of their health if there is more health care available. A) True B) False C) Uncertain Answer: C 17. In Figure 9.2, the value of insurance is $7,000. A) True B) False C) Uncertain Answer: B 18. At any given time in the US, 16 percent of the population lacks health insurance. A) True B) False C) Uncertain Answer: A 19. The US is the leader in health care. A) True B) False C) Uncertain Answer: C 20. Health care costs have been increasing dramatically in the US. A) True B) False C) Uncertain Answer: A 21. Most private medical insurance is provided through employers as a benefit to their employees. A) True B) False C) Uncertain Answer: A 22. In Figure 9.3, Panel B, $40,000 for certain is as desirable as $47,000 with risk. A) True B) False C) Uncertain Answer: A 23. In Table 9.2, Emily will lose no income if she becomes sick. A) True B) False C) Uncertain Answer: B 24. A co-payment and coinsurance are the same thing. A) True B) False C) Uncertain Answer: B 25. One reason for the recent increases in health care costs is the aging of the American population. A) True B) False C) Uncertain Answer: A Essay 26. We have read that the uninsured and the insured behave differently in regard to medical services. Suppose that the insured have a demand curve that can be written as Q = 100 – P, where Q is the quantity of medical services and P is the price. Suppose further that the uninsured have a demand curve that can be written as Q = 100 – 2P. (a) At a price of $10 of medical services, how much will each demand? (b) At a quantity of 50 units, how much will the price be for the insured and uninsured? Answer: (a) For insured at a price of $10, we have Qi = 100 – 10 = 90.For the uninsured at a price of $10, we have Qu = 100 – 2*10 = 80. (b) For the insured at a quantity of 50, we have 50 = 100 – Pi, Pi = 50. For the uninsured at a quantity of 50, we have 50 = 100 – 2Pu, Pu = 25. 27. Suppose that the demand for medical services can be characterized by the equation X = 500 – P/3. Suppose further that the supply of health services can be characterized by the equation X = P – 100. (a) What is the equilibrium quantity and price in the market for health services? (b) In an effort to make health services more affordable, the government restricts the price of health services to be no greater than $250. What will happen to the quantity of health services in the market? Answer: (a) Set 1,500 – 3X = 100 + X to get that X* = 350 and P* = $450. (b) At a price of $250, a shortage of health services will occur. X* will now be only 150. 28. Suppose there are two drivers, Jermaine and Janet. Jermaine is not a very safe driver. In fact, there is a 7.5% chance that he will have an accident within the next year. Janet is a relatively safe driver. Her chances of having an accident in the next year are only 1%. If Jermaine is involved in an accident, he will cost the insurance company $1,000,000. If Janet is involved in an accident, she will only cost the company $500,000. What is the expected pay-out that the company can expect from insuring these two? Answer: The expected payout is 1,000,000(0.075) + 500,000(0.010) = $80,000. 29. We have read in this chapter that people with insurance may be more likely to engage in risky behavior because they are insured. Does it make sense then that there should be an “insurance tax” on people that engage in these types of activities? Answer: Answers will vary, but in general, this is not a good idea. The essence of this idea is to raise the price of an insurance premium, which might discourage some from engaging in riskier activities. Yes, it can make sense to impose an "insurance tax" on activities that pose higher risks when insured. This tax would help account for the increased likelihood of risky behavior due to insurance coverage, thereby discouraging excessive risk-taking and promoting more responsible behavior. 30. Since nearly a third of all people between the ages of 18 and 24 are uninsured, does it make sense to impose a surcharge for medical services to this cohort? Answer: It does not make sense to have a medical surcharge for this group since they are already less likely to use medical services. Programs designed to increase healthy lifestyles might be a viable alternative. 31. What effect would a “price cap” have on medical services? Answer: As we learned in previous chapters, a price cap would have the effect of creating shortages in that the supply of medical services would not meet the demand. 32. President Obama has suggested some form or universal health coverage for all Americans. How do you feel about this? Answer: Answers will vary with some saying that government will not be able to administer such a system and there will be shortages. In addition, some will argue that the system will bankrupt the country. On the other hand, some will say that with coverage being more readily available, average productivity of Americans will rise. In addition, some will argue that since the government has massive influence, it will be able to demand lower prices. President Obama's suggestion of universal health coverage aimed to ensure that all Americans have access to healthcare, addressing issues of affordability and coverage gaps. This proposal aims to improve public health outcomes and reduce financial burdens associated with medical care. The effectiveness and feasibility of such a policy depend on various factors, including its implementation, funding mechanisms, and broader societal implications. Chapter 10 Government and the Market for Health Care Multiple Choice 1. The highest percentage of uses of health care funds in the US for 2004 was A) research. B) hospital care. C) home health care. D) nursing home care. Answer: B 2. There are two forms of health care provided by the government: _________ is provided for the poor, and _________ is provided for the elderly. A) HMO; Medicare B) PMI; HMO C) Medicaid; Medicare D) Medicare; Medicaid E) SSI; Medicare Answer: C 3. What was the percentage of GDP that was expended, in total, on health care? A) 0.132% B) 12% C) 13.2% D) 16% Answer: D 4. __________ account(s) for the largest portion of public health expenditure in the United States. A) Children’s hospitals B) Universal health coverage C) Medicaid D) Medicare Answer: D 5. The prescription drug benefit plan was added to Medicare in A) 2006 B) 1996 C) 1965 D) 1944 Answer: A 6. The __________ level of government accounts for the largest share of health care spending. A) regional B) state C) municipal D) federal Answer: D 7. US health care spending amounts to _____ per year. A) $7.8 billion B) $1.1 million C) $2.2 trillion D) $4.4 trillion Answer: C 8. The Medicaid program provides health insurance for the A) elderly. B) poor. C) veterans of wars. D) slow. Answer: B 9. A catastrophic insurance policy is one which A) has cats causing health crises. B) insurance policy that has a high deductible. C) generous coverage for high medical costs. D) a & c E) b & c Answer: E 10. What does job lock mean? A) A tendency for workers to remain in their jobs to keep their insurance coverage B) A job where a time clock is used C) A job that provides insurance coverage only after several years of employment D) all of the above Answer: A 11. How many elderly people are covered by Medicare? A) one third B) one half C) almost all D) almost none Answer: C 12. In the United States, universal health care is administered by A) the federal government. B) state governments. C) private insurance companies. D) hospitals. E) none of the above. Answer: E 13. In 1980, 26 million people in the US were over the age of 65. What is the amount currently? A) 34 million B) 35 million C) 36 million D) 37 million Answer: D 14. Private health insurance pays for what percentage of health care expenditures? A) 0 B) 5 C) 40 D) 35 Answer: D 15. Generally, managed care means A) health care is provided by teams, not by an individual doctor. B) limits are placed on utilization of health care services. C) health care is provided by the government to all citizens. D) doctors pick which patients they want to see. Answer: B True/False 16. Under federal tax law, employer provided health insurance is not subject to taxation. A) True B) False C) Uncertain Answer: A 17. At any given time, about 95% of the population in the United States lacks health insurance. A) True B) False C) Uncertain Answer: B 18. Part C of Medicare allows eligible individuals to have health care coverage up to $100,000 annually. A) True B) False C) Uncertain Answer: B 19. Job lock is good for the US work force. A) True B) False C) Uncertain Answer: C 20. HI (Hospital Insurance) is financed by a payroll tax, while SMI (Supplementary Medical Insurance) is financed out of general revenues. A) True B) False C) Uncertain Answer: A 21. Refer to Figure 10.3, expenditures as a percent of GDP fell dramatically in the 1980s. A) True B) False C) Uncertain Answer: B 22. Medicare requires individuals to take a standard health test first, but Medicaid does not. A) True B) False C) Uncertain Answer: B 23. Due to moral hazard, the goal of providing security is likely to conflict with the goal of efficiency. A) True B) False C) Uncertain Answer: A 24. The health care system currently in place will be dramatically changed in the next four years. A) True B) False C) Uncertain Answer: C 25. The “Connector” is a new medical device that helps with breathing. A) True B) False C) Uncertain Answer: B Essay 26. Suppose that the quantity demanded of visits to a doctor per year is given by X = 12 – 0.05P, where X is the number of visits and P is the price the patient pays for a visit. (a) How many visits would the patient make if he or she had to pay the full price of a visit, $100? (b) How many visits would a patient make if he or she was insured and had to pay only a 15% co-insurance payment per visit? (c) How many visits would the patient make if medical services were free? Answer: (a) At the full price of $100, she would make X = 12 – 0.05(100) = 7 visits. (b) If she has to pay the 15% co-pay per visit, her price is just $15, so X = 12 – 0.05(15) = 11.25. (c) If services were free, she would make X = 12 – 0.05(0) = 12 visits. 27. Suppose that the demand curve Dm for medical services can be characterized by the equation M = 2000 – P, where M is the amount of medical services received per year and P is the price. Suppose further that P0 is constant at 800. (a) Find the equilibrium quantity of services at P0. (b) Find the equilibrium quantity of services when there is only a co-payment of 20% required such that the price is 0.2P0. (c) How much additional expenditures induced by insurance are created? Answer: (a) At a price of $800, M = 2,000 – 800 = 1,200. (b) To find the answer, we need 0.2(800) = 160. Therefore, 2,000 – 160 = 1,840. (c) The area we want which is 800 (1,840 – 1,200) = 512,000. 28. Suppose that the demand for medical services can be characterized by the equation P = 100 – Q. Suppose further that the supply of health services can be characterized by the equation P = Q + 50. (a) What is the equilibrium quantity and price in the market for health services? (b) In an effort to make health services more affordable, the government restricts the price of health services to be no greater than $65. What will happen to the quantity of health services in the market? Answer: (a) Set 50 + Q = 100 – Q to get that Q* = 25 and P* = $75. (b) At a price of $65, a shortage of health services will occur. Q* will now be only 15. 29. Refer to figure 10.5 in your text. What would be the impact on the three categories of people if they were given the value of medical insurance in cash instead of having it provided? Answer: In general, we cannot answer this question. In panel A we could expect that this person would choose to have more insurance. In panel B it is possible for this person to continue with the same level of coverage but have more of all other goods. In addition, this person could actually choose to have less insurance. The same thing is possible for the individual in panel C. 30. With the aging of the American population, it might be necessary to reduce the medical benefits to elderly. How do you feel about this idea? Answer: This is a personal question, but unless there is some sort of restructuring of the medical system, it may be necessary to reduce benefits, increase premiums, or limit coverage of certain types of care. One solution may lie in greater emphasis on preventative care against smoking and obesity. 31. What do you feel would be the effect of a mandate that requires all people to purchase health insurance? Answer: Some people do not have insurance because they choose not to, not because they cannot afford it. Some people feel that the money spent on insurance would enhance their quality of life more by being spent on other items. Given preexisting illnesses, it would be very costly for some to afford. Car insurance, however, is mandatory for all who drive; however, those who do not want to pay do not have to drive. With health insurance, this option does not exist.3 32. The idea of a Health Savings Account (HSA) was enacted in 2003. What do you think are its main strengths? Answer: With the tax breaks built into the legislation, more individuals can have access to insurance. More importantly, they will do so at lower costs since there is reason not to over consume this service. Test Bank for Public Finance Harvey Rosen, Ted Gayer 9780078021688
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