Understanding Insurance and Imperfect Information

1. _____________ is a method that households and firms use to prevent any single event from having a significant detrimental financial effect.

a. Assurance

b. Insurance

2. Households or firms that purchase insurance make regular payments, called _________________.

a. premiums

b. installments

c. EMIs

3. All insurance involves imperfect information in both an obvious way and in a deeper way. 

a. At an obvious level, future events cannot be predicted with certainty.

b. At the deeper level, it is difficult for an insurance company to estimate the risk attached to an event.

c. both a and b

4. Federal and state governments in the U.S. run a number of insurance programs. Some of the programs include:

a. Unemployment insurance

b. pension insurance

c. deposit insurance

d. all of these

5. Insurance companies often classify people into risk groups, and charge lower premiums to those with lower risks because________________.

a. If people are not separated into risk groups, then those with low-risk must pay for those with high risks.

b. If people are not separated into risk groups, then those with high-risk must pay those with low risk.

c. both a and b

6. The two major problems of imperfect information in insurance markets include:

a. moral hazard 

b. adverse selection

c. unfair treatment

d. only a and b

8. What is the impact of adverse selection on economic efficiency in a market?

a. Adverse selection will increase economic efficiency.

b. Adverse selection will reduce economic efficiency.

c. Adverse selection does not have any impact on economic efficiency in a market.

d. Consumer wants will shift toward the goods left in the market. 

9. Asymmetric information problems are particularly severe in the market for insurance. This is true because

a. insurance companies will always know more about the likelihood of an event happening than will buyers of insurance.

b. buyers of insurance will always know more about the likelihood of an event happening than will insurance companies.

c. insurance companies and buyers of insurance cannot distinguish between good and bad information.

d. insurance companies are non-depository financial institutions. 

11. Which of the following makes the adverse selection problem in the health insurance market worse?

a. charging high premiums for insurance coverage

b. refusing to offer insurance policies to certain people

c. requesting a medical examination for new applicants

d. all of the above

12. Which of the following is a consequence of the adverse selection problems that health insurance companies face?

a. Health insurance companies charge less for young, healthy people than old, less healthy people.

b. Health insurance companies sometimes refuse to offer health insurance to people with chronic illnesses.

c. Health insurance companies sometimes refuse to offer group insurance to large companies because there are too many insured people to accurately price this insurance.

d. The equilibrium quantity of health insurance is greater than it would be in the absence of adverse selection. 

14. In March of 2010, President Obama signed into law the Patient Protection and Affordable Care Act (PPACA). This is also called:

a. Obamacare

b. Medicaid

15. The components of the Affordable Care Act (ACA) include:

a. a requirement that healthcare providers switch to electronic medical records (EMRs).

b. the requirement that states establish health insurance exchanges, or markets.

c. the regulation that caps the amount healthcare providers can spend on administrative costs.

d. all of the above

10. Which of the following groups tends to worsen the problem of adverse selection in health insurance market?

a. good people

b. sick people

c. people living in houses made entirely of rock

d. all of the above 

7. When adverse selection exists in the used car market, which of the following will prevail?

a. Buyers will generally offer a very high price, closer to the price of a good car.

b. Buyers will generally offer a very low price, closer to the price of a lemon.

c. Buyers will generally offer a price somewhere between the price they would be willing to pay for a good car and the price they would be willing to pay for a lemon.

d. All buyers will end up buying a car. 

13. Which of the following is true about adverse selection and moral hazard?

a. Adverse selection is a consequence of asymmetric information; asymmetric information is a consequence of moral hazard.

b. Insurance companies can eliminate adverse selection by charging deductibles and co-insurance, but charging deductibles and co-insurance increases the risk of moral hazard.

c. Adverse selection affects only the market for automobile insurance; moral hazard affects only the markets for health and life insurance.

d. Adverse selection refers to what happens at the time of entering into a transaction; moral hazard refers to what happens after entering into a transaction.