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Economics 436 Answer Key for Midterm Exam Professor Thornton Name: ANSWER KEY Part 1. 1. D 16. A 2. B 17. B 3. D 18. C 4. A 19. C 5. D 20. C 6. A 21. D 7. C 22. B 8. A 23. D 9. C 24. C 10. D 25. C 11. A 12. B 13. C 14. B 15. D 1 Part 2: List Questions 1. Any of the following three: Guaranteed issue Guaranteed renewability Premium restrictions Deductible restrictions Annual and lifetime coverage restrictions No out-of-pocket payment for preventive medical care services 2. Health Validation services Consumer (or hotel) services 3. Any of the following three: Nominal medical care spending Real medical care spending Medical care spending per capita Medical care spending as a percent of GDP Part 3: Definitions 1. Moral hazard – When an individual does not bear the full cost of her decisions and she has an economic incentive to make choices that increase her own welfare, but reduce the welfare of society. 2. Supplier-induced demand – When a medical care provider recommends unnecessary medical care services for financial gain. Parts 4 and 5: Short Answer 1. Utilization of more medical care services may improve population health. An improvement in population health results in an increase in total hours worked (i.e., an increase in the labor force) and an increase in output produced per hour (i.e., productivity). The increase in total hours worked and output produced per hour results in an increase in the amount of goods and services in the U.S. economy. 2. The Hippocratic oath instructs the doctor to do whatever is necessary to improve a patient’s health without harming the patient. From an economic point of view, the doctor is taking an oath to recommend medical care services that have a benefit, but ignore the cost. However, any medical care service for which the social cost exceeds the social benefit is unnecessary if the objective of society is to maximize social economic welfare. 3. If a hospital invests in information technology it incurs a cost. However, it cannot bill the patient or a third-party payer for the use of information technology, and therefore cannot generate the revenue necessary to cover the cost. Moreover, investing in information technology may improve the quality of care so that fewer patients are admitted to the hospital or patients spend fewer days in the hospital. This would result in a decrease in demand for the hospital’s services and a decrease in revenue. 2 4. To evaluate the expected benefit of taking Cprev and make a rational choice, you need information on the amount by which the drug is expected to decrease your absolute risk of colon cancer (i.e., your marginal risk). However, studies typically report an estimate of relative risk. The doctor does not indicate whether the drug will reduce absolute risk or relative risk by 50%. A reduction in absolute risk of 50% is a very big benefit; a reduction in relative risk of 50% may be either big or small depending on your absolute risk of colon cancer. This information is incomplete, because you do not know whether this is the reduction in marginal risk or relative risk from taking the drug. Essay Question This question has no right or wrong answer; that is, you could answer either yes or no. Your answer is graded based on how well you supported it. 3