Download Multiple Choice Questions

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
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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.
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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.
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