Multiple choice: 1) If the idea of insurance is to share the risks of bad outcom
ID: 1210045 • Letter: M
Question
Multiple choice:
1) If the idea of insurance is to share the risks of bad outcomes, in what sense does insurance share the risks.?
a. Assuming randomness of bad outcomes in a group, the probability of bad outcomes can be calculated, and insurance premiums set to cover the group’s costs.
b. Insurance transfers the risks from those individuals willing to bear it to those who are unwilling to.
c. Insurance transfers the costs to the young and healthy from the old and sick.
d. All are true.
2) How does adverse selection affect the ability of insurance companies to provide the benefit of risk sharing?
a. Insurance companies know more than the insured about its outcomes.
b. The individual thinks healthcare is a free good because it is paid for by a third party.
c. The probability of bad outcomes in a group is likely to be higher and less likely to be random.
d. All the above.
3) What is the adverse selection “death spiral” that might lead to the collapse of the healthcare insurance market?
a. Insurance premiums will be set to high.
b. Premiums will be set too low.
c. It will cause healthy individuals to leave the group.
d. Both a and c.
e. Both b and c.
4) Critics of food stamps argue that low income should be given cash payments rather than food vouchers. What are their arguments?
a. They would rather spend it on drugs.
b. The outcome is the same whether or not you give them food stamps or cash.
c. Low income know better what they need.
d. Both a and b.
e. Both b and c.
Explanation / Answer
1. d. All are true
2. c. The probability of bad outcomes in a group is likely to be higher and less likely to be random.
3. e. Both b and c.
4. b. The outcome is the same whether or not you give them food stamps or cash.
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