Exam III Review

Question 1

insurance premiums

Answer 1

money that is paid to an insurer so that an individual will be insured against adverse events

Question 2

means-tested welfare programs

Answer 2

refers to programs in which eligibility depends on the level fo one’s current income or assets

Question 3

consumption smoothing

Answer 3

the translation of consumption from periods when consumption is high, and thus has low marginal utility, to periods when consumption is low, and thus has high marginal utility

Question 4

expected utility model

Answer 4

the weighted sum of utilities across states of the world, where the weights are the probabilities of each state occuring

(1-p) X U (consumption with no adverse event) + p x U (consumption with adverse event)

Question 5

acturially fair premium

Answer 5

an insurance premium that is set equal to the insurer’s expected payout

Question 6

central result of expected utility theory

Answer 6

with actuarially fair pricing, individuals will want to fully insure themselves to equalize consumption in all states of the world

Question 7

risk aversion

Answer 7

the extent to which individuals are willing to bear risk

Question 8

information asymmetry

Answer 8

the difference in information that is available to sellers and to purchasers in a market

Question 9

adverse selection

Answer 9

the fact that insured individuals know more about their risk than does the insurer might cause those most likely to have the adverse outcome to select insurance, leading insurers to lose money if they offer insurance

Question 10

risk premium

Answer 10

the amount that risk adverse individuals will pay for insurance above and beyond the actuarially fair price

Question 11

pooling equilibrium

Answer 11

a market equilibrium in which all types of people buy full insurance even though it is not fairly priced to all individuals

Question 12

ways to fight adverse selection

Answer 12

1. pooling equilibrium

2. offering separate products at separate prices (separating equilibrium)

Question 13

separating equilibrium

Answer 13

a market equilibrium in which different types of people buy different kinds of insurance products design to reveal their true types

Question 14

self-insurance

Answer 14

the private means of smoothing consumption over adverse events, such as through one’s own savings, labor supply of family members, or borrorwing from friends

Question 15

moral hazard

Answer 15

adverse actions taken by individuals or producers in response to insurance against adverse outcomes

Question 16

three types of health insurance patient payments

Answer 16

1. deductibles: individuals face the full cost of their care but only up to some limit
2. copayments: individuals make some fixed payment when they get a medical service
3. coinsurance: the patient pays a percentage of each medical bill rather than a flat dollar amount

Question 17

nongroup insurance market

Answer 17

the market through which individuals or families buy insurance directly rather than through a group, such as workplace

Question 18

two reasons employers provide private insurance

Answer 18

1. risk pooling

2. the tax subsidy

Question 19

risk pooling

Answer 19

the group of individuals who enroll in an insurance program

• allows companies to create large insurance pools with a predictable distribution of medical risk
• prevents adverse selection

Question 20

two benefits of risk pooling

Answer 20

1. absence of adverse selection
2. law of large numbers: as the size of teh pool grows, the odds that the insurer will be unable to predict the average health outcome of the pool falls

Question 21

tax subsidy to employer-provided health insurance

Answer 21

workers are taxed on their wage compensation but not on compensation in the form of health insurance, leading to a subsidy to health insurance provided through employers

Question 22

medicare

Answer 22

a fedearl program that provides health insurance to all people over age 65 and disabled persons under age 65

Question 23

medicaid

Answer 23

a fedearl and state program that provides health care for the poor

Question 24

job lock

Answer 24

the unwillingness to move to a better job for fear of losing health insurance

Question 25

prospective reimbursement

Answer 25

the practice of paying providers based on what treating patients should cost, not on what the provider spends
-forces doctors to treat their patients cost effectively

Question 26

retrospective imbursement

Answer 26

reimbursing physicians for the costs they ahve already incurred
-removes incentives for doctors to treat their patients cost effectively

Question 27

who is eligible for Medicaid?

Answer 27

all individuals age 18 or young at a point up to 100% of the poverty line, and children under 6 and pregnant women are covered up to 133% of the poverty line

Question 28

what services does Medicaid cover?

Answer 28

federal rules require states to cover major services, but not prescription drugs or dental care
-all states cover drugs and optometrist services, all but one cover dental

Question 29

how do Medicaid providers get paid?

Answer 29

states regulate the rate at which health service providers are reimbursed
-typically, most states reimburse physicians at a much lower level than the private sector

Question 30

national health insurance

Answer 30

a system whereby the government provides insurance to all ints citizens, as in Canada, with out the involvement of a private insurance industry

Question 31

legacy debt

Answer 31

the debt incurred by the governmetn because early generations of beneficiaries received much more in benefits than they paid in taxes

Question 32

poverty line

Answer 32

the federal government’s standard for measuring absolute deprivation

Question 33

how was the poverty line devised?

Answer 33

this lady named Molly started with nutritional standards for a minimally acceptable diet and applied average national foods costs to price out the cost of buying this bundle of goods for families of different sizes

• calculated that 1/3 of a families income is spent on food
• multipled that first value by 3
• its adjusted for inflation every year

Question 34

problems with the poverty line

Answer 34

1. the bundle of household goods has changed: by 2010, typical family only spent 13% of budget on food
2. differences in cost of living across areas are ignored
3. income definition is incomplete: the computation of the poverty rate compares an individual’s cash income to the pvoerty standard. Cash income is not a true representation of the individual’s available resources

Question 35

categorical welfare

Answer 35

welfare programs restricted by some demographic characteristic, such as single motherhood or disability

Question 36

means-tested welfare

Answer 36

welfare programs restricted only by income and asset levels

Question 37

cash welfare

Answer 37

welfare programs that provide cash benefits to recipients

Question 38

in kind welfare

Answer 38

welfare programs that deliver goods, such as medical care or housing, to recipients

Question 39

benefit reduction rate

Answer 39

the rate at which welfare benefits are reduced per dollar of other income earned

Question 40

Three sources of leakage for welfare policy

Answer 40

1. administrative costs of enabling this transfer (roughly 10% of all TANF spending)
2. higher income individuals are taxed to pay for income transfers; this taxation lowers reutnrs to work and saving and might cause higher income people to work less hard or save less
3. moral hazard effects on teh poor individuals who are potential recipients of these transfters
   - individuals might reduce labor in order to become poor and qualify for cash welfare

Question 41

the iron triangle of redistributive programs

Answer 41

there is no way to change either the benefit reduction rate or the benefit guarantee to simultaneously encourage work, redistribute more income, and lower costs

Question 42

how do we solve the problem of decreasing labor and moral hazard with welfare recipients?

Answer 42

lower the benefit reduction rate!

-not clear if this will do

Question 43

3 major ways to reduce the moral hazard of welfare

Answer 43

1. moving to categorical welfare payments
   - targeting mechanisms
2. using ordeal mechanisms
3. increasing outside options

Question 44

ordeal mechanism

Answer 44

features of welfare programs that make them unattractive, leading to the self selection of only the most needy recipients

Question 45

how is social security financed?

Answer 45

almost all workers in the USA pay the Federal Insurance Contributions Act tax on their earnings

• this rate is currently 6.2%, employers also pay a tax of 6.2% on these same earning
• only levied on first 110,100 of earnings

Question 46

who is eligible for social security?

Answer 46

to be eligible, a person must have worked and paid his payroll tax for 40 quarters over his or her lifetime and must be 62 years or older

Question 47

how are social security benefits calculated?

Answer 47

when eligible, the social security claimant receives an annuity payment that is a function of the recipient’s average lifetime earnings, hwere each month’s earnings are expressed in today’s dollars by inflating their value for increases in the wage level since the earnings occured
-usually an average of an individual’s 35 highest earning years

Question 48

Ida May Fuller example of why Social Security is destined to fail

Answer 48

Ida May Fuller was the first beneficiary of Social Security

• she worked for a total of 3 years after the establishment of the SS system, and paid a total of $24.75 in taxes
• she lived for 35 more years after her initial payment and collected a total of $22,888.92 in SS benefits
• pretty solid investment

Question 49

rationales for social security

Answer 49

1. there’s a market failure in the annuities market
   - adverse selection can lead the annuities market to fail
   - individuals know more about their potentnial life expectancy than do insurers
2. paternalism: they are concerned that people won’t save enough for their own retirement
   - according to studies, only about 55% of singles and 70% of those without a high school diploma have saved enough for retirement

Question 50

in theory, what are the two effects of social security on retirement decisions?

Answer 50

1. implicit taxation: levied on work by SS at older ages by reducing the value of SS benefits if retirement is delayed
   - Gruber and Wise define the implicit tax rate from SS as the reduction in SS wealth if one continues working another year relative to the wage that could be earned by working that year
2. redistributive property of SS
   - system results in some groups becoming richer over their life, and others becoming poorer. These changes in wealth will have income effects on retirement, as the groups that are richer use some of their wealth to buy themselves more retirement, adn the groups that are poorer work longer

Question 51

what are some suggested incremental reforms to Social Security?

Answer 51

1. raise taxes further
2. extend the base of taxable wages
3. raise the retirement age
4. lower benefits
5. reduce benefits for higher income groups

Question 52

what are some fundamental reforms proposed for Social Security?

Answer 52

1. invest the trust fund in stocks

2. privatization

Question 53

principal agent problem

Answer 53

you pay the physician to do things in yoru best interest, but the physician may have their interests in mind…may try to give you extra services you don’t need