Econ 344
Problem Set #4
Assigned: Th. Oct. 15, 2009
Due: Tu. Oct. 22,
2009
1. Which of the following is consistent with there being a moral hazard effect of workers' compensation?
a. After the WC system is introduced, more workers report injuries.
b. After the WC system is introduced, more missing fingers are reported on Mondays.
c. After the WC system is introduced, the ratio of back stains to lacerations increases.
d. Both a and b are correct.
e. Both a and c are correct.
2. Which of the following best describes welfare programs that provide recipients with a monthly check?
a. in-kind welfare
b. categorical welfare
c. means-tested welfare
d. non-hedonic welfare
e. cash welfare
3. The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 did which of the following?
a. It imposed time limits on welfare recipients.
b. It imposed work requirements on welfare recipients.
c. More flexibility was given to the states in choosing the structure of cash welfare payments.
d. All of the above are correct.
e. Both a and b are correct.
4. If the government were to give every student a voucher to redeem at any school, it would be intervening through _________. If the government were to mandate no tuition costs more than $6,000/year without intervening in any other way, it would be intervening through__________.
a. public provision; private provision
b. the price mechanism; the price mechanism
c. the quantity mechanism; the price mechanism
d. the price mechanism; the quantity mechanism
e. public provision; public provision
5. Which of the following programs provides insurance against medical expenditures in old age?
a. disability
insurance
b. Social Security
c. workers' compensation
d. Medicare
e. unemployment insurance
6. Which of the following refers to the federal government's standard for measuring the amount of income the poor have relative to some measure of "minimally acceptable" income?
a. the poverty line
b. relative income inequality
c. the iron triangle
d. absolute deprivation
e. allocative inefficiency
7. Removing "welfare lock" means which of the following?
a. Government should not incarcerate the fathers of children in single-mother welfare homes because it reduces child support payments.
b. Government should unlink cash welfare from other in-kind benefits.
c. Government should reduce the benefits reduction rate to increase the benefits of working.
d. All welfare payments should be given based on unchangeable characteristics.
e. None of the above is correct.
8. Which of the following is NOT one of the three forms or moral hazard related to health insurance (HI)?
a. With HI, people are less likely to try their best to live a healthy life style.
b. People tend to over-consume health care services if they have HI.
c. Those who think they have a higher risk of getting cancer are more likely to buy HI.
d. If people know that they will have access to health care even if they do not have HI, they will not buy HI.
9. The Earned Income Tax Credit (EITC):
a. provides more income to those people on welfare.
b. is a tax on low income workers.
c. provides additional tax credits to low income workers.
d. is a tax break for the wealthiest Americans.
e. was eliminated by the Bush administration.
10. Which is the largest cash transfer program for the poor?
a. TANF
b. Medicare
c. SSI
d. Medicaid
e. Section 8
11. Medicaid is administered by the ___________ and is financed by ____________.
a. states; general revenues
b. states; a payroll tax levied on employees and employers
c. federal government; general revenues
d. federal government; a payroll tax levied on employers
e. federal government; a payroll tax levied on employees
True/False/Uncertain----explain (2*2=4pts.)
12. T F U Under federal tax law, employer‑provided health insurance is not
subject to taxation.
13. T F U One reason for the recent increases in health care costs is the aging
of the American population.
III. Open questions
1. (12 points) Purpose—understand how cost sharing may alleviate moral hazard problem.
Anna’s demand each year for visit to doctors is given by: Q = 10 - .05P, where Q is the number of visits, and P is the price Anna pays for a visit.
a. (3 points) How many visits would Anna take if P=$80 and she is not insured?
b. (3 points) How many visits would Anna take if P=$80 but she is insured with a co-insurance payment of 25%? Suppose P=$80 is also the true social cost of visits to doctors, what is the social welfare loss from this co-insurance program for Anna?
c. (3 points) Please draw Anna’s demand curve and show the visits she takes and the price she pays in part a. and b. Please also indicate the welfare loss in b.
d. (3 points) Will a co-pay of $20 per
visit improve social welfare relative to the co-insurance policy in part b.?
Why and by how much, if any?
2. (15 pts) Jackie spends her money on food and all other goods. Right now, she has an income of $600 per month. Compare two alternative welfare programs in which she could participate:
program A would provide her with a monthly check of $300 and program B
would provide her with $400 a month in credits that can be spent only on food.
a. Draw Jackie’s budget constraints in each of these two cases.
b. Draw representative indifference curves that would reflect each of these three scenarios (see the graph in a).
(i) Jackie prefers program A to program B.
(ii) Jackie prefers program B to program A.
(iii) Jackie is indifferent between the two programs.
3. (ch14) (8pts.) Governments typically provide disability insurance and unemployment insurance to workers. In contrast, governments typically mandate that firms provide workers’ compensation insurance to their workers but do not provide the coverage.
a. Why the difference?
b. Why don’t governments provide workers’ compensation instead of mandating it?
.
4. (6 pts) Ch 14, #7. Gruber (2000) found evidence that the elasticity of labor supply with respect to disability insurance benefits is considerably smaller than the estimates of the elasticity of unemployment durations with respect to unemployment insurance benefits. Why might moral hazard be less of an issue in the disability insurance program than in the unemployment insurance program?
5. (15 pts) An individual can earn $12 per hour if he or she works. Draw the budget constraints that show the monthly consumption–leisure trade-off under the following three welfare programs.
a. The government guarantees $600 per month in income and reduces the benefit by
$1 for each $1 of labor income.
b. The government guarantees $300 per month in income and reduces that benefit by
$1 for every $3 of labor income.
c. The government guarantees $900 per month in income and reduces that benefit by
$1 for every $2 in labor income, until the benefit reaches $300 per month. After that point, the government does not reduce the benefit at all.
6. (12 pts) Suppose the government decided to subsidize health insurance for the currently uninsured, requiring participants to pay half of their health insurance costs up to 10% of total family income. Short essay
a. How might this policy affect the use of medical care by the uninsured and their
health?
b. How might this policy affect the employer provision of health insurance?
c. How might this policy affect hours of labor supplied by workers?
7. (6 pts) The Baucus bill on health care reform recently
cleared the Senate finance committee.
One of the provisions includes insurance market reforms.
Individuals could not be charged more or denied coverage because of
pre-existing conditions. Insurers could no longer drop coverage when
individuals get sick.
The reaction of the representative from the US Chamber of
Commerce was:
“The bill imposes
hundreds of billions of dollars in new health care taxes and provides an
incentive for people to wait until they are sick to purchase coverage,” Ignagni said.
a. What
insurance-related issue are they referring to?
Do they have a
valid point? ie what do you think will happen to insurance
company profits with this provision?
b. What is a possible strategy for dealing
with this possible outcome of this provision?