Asymmetric Information and Agency Quiz Answers

Asymmetric Information and Agency Key Ideas • Information is a different kind of economic good. If symmetric, both sides have the same information. If asymmetric, one side has different information than the other. • Information may be easily transmitted, or it may be acquired with difficulty. • Under some circumstances, information asymmetries may keep markets from existing. • In many health markets, the provider or the insurer are more knowledgeable than the patient, and act as agents for the principal, that is, the patient. Teaching Tips • The lemons example will be familiar to any student who has ever bought or sold a used car. This can spark a lively discussion about how the market works. • Increasing numbers of students have participated in eBay, Craigslist, or other online marketing services. They will be glad to share how they provide information, and how they choose customers (positive and negative feedback). This gives them firsthand experiences as to how markets work. • Most students use the Internet for buying and selling goods. An interesting class discussion would be to look at how the students process information they get from the Internet. • Discuss how “managed care” (HMO, PPO, and so on) managers serve as agents of the consumer. Are they good agents? • Before the passage of the Affordable Care Act, some insurers would “reunderwrite” (change the terms of) health insurance policies, when they got new information about their patients. Was it fair? What are the similarities in this case between life insurance, and car or home insurance? Multiple-Choice Questions 1. An asymptomatic patient going for a colonoscopy is an example of: a. symmetric information, because neither the provider nor the client has prior knowledge of the condition.* b. asymmetric information, because the clinician has knowledge of the patient’s condition. c. asymmetric information, because the provider recommends the test to all patients over the age of 50. d. symmetric information, because both the provider and the patient will find out the results. 2. An asymptomatic former smoker going for a chest X-ray is an example of: a. symmetric information, because neither the provider nor the client has prior knowledge of the condition. b. asymmetric information, because the clinician has knowledge of the patient’s condition. c. asymmetric information, because the patient has information that she has not shared with the provider.* d. symmetric information, because both the provider and the patient will find out the results. 3. Asymmetric information means that: a. b. c. d. providers and clients have no information. providers and clients have the same information. providers and clients have different information.* clients have no information. 4. Pauly has argued that about ___ percent of health expenditures can be regarded as “reasonably informed.” a. b. c. d. 0–5 15–20 25–33* 50–60 5. In Akerlof’s lemons problem, with symmetric information, suppose that five cars are available with quality levels 0, 1, 2, 3, and 4. If the sellers have a reservation price of $3,000 per unit of quality, and the buyers value cars at $4,000 per unit of quality, the equilibrium price per car will be: a. b. c. d. $4,000. $6,000. $8,000.* No market will exist. 6. In problem (4), if instead sellers know more about their cars than do buyers, the equilibrium price will be: a. b. c. d. $4,000. $6,000. $8,000. No market will exist.* 7. In Akerlof’s lemons problem, with symmetric information, suppose that 101 individuals face a possible insurable event of $50,000 with a uniform probability distribution. If the individuals are better informed than the insurer, as to their health and the insurer prices according to the average for the group, the equilibrium price will be: a. b. c. d. $12,500. $25,000. $37,500. No market will exist.* 8. In Akerlof’s lemons problem, with symmetric information, suppose that 101 individuals face a possible insurable event of $50,000 with a uniform probability distribution. If the insurer requires a physical examination from all of those potentially insured, and the insurer prices according to the average for the group, the equilibrium price will be: a. b. c. d. $12,500. $25,000.* $37,500. No market will exist. 9. Adverse selection in insurance markets typically occurs when: a. employers insist on a single plan for all clients. b. consumers have better information on their health than do insurers.* c. insurers have better information on their health than do consumers. d. employees choose to self-insure. 10. Adverse selection and moral hazard: a. are two names for the same economic phenomenon. b. are illegal under the Affordable Care Act.* c. differ according to time – moral hazard occurs before the client is insured, while adverse selection occurs after the policy is written. d. can both lead to the failure of insurance markets to develop. 11. If smokers do not disclose their habit: a. they will pay lower premiums than is economically efficient for their insurance. b. non-smokers will pay higher premiums than is economically efficient for their insurance. c. non-smokers will eventually leave the insurance pool if they can. d. Answers (a), (b), and (c) are correct.* 12. Adverse selection is economically inefficient because: a. b. c. d. lower risks will tend to underinsure. all clients will tend to overinsure. higher risks will tend to overinsure Answers (a) and (c) are correct.* 13. Insurers may protect themselves against asymmetric information, leading to adverse selection of high-risk patients, by: a. refusing to pay claims occurring within a year of the date that the policy is written. b. requiring physical exams for all clients. c. ceasing to offer the particular type of insurance. d. Answers (a), (b), and (c) are correct.* 14. “Cream skimming” refers to: a. b. c. d. a form of moral hazard where consumers demand excess care. a form of adverse selection where HMOs or insurers seek healthier clients.* governments forcing insurers to treat all clients. Answers (a) and (c) are correct. 15.An “individual mandate” requiring people to buy insurance, addresses “cream skimming” because: a. it pushes the healthier people, who might otherwise not purchase insurance, into the risk pool.* b. it makes it illegal for managed care organizations or insurers to seek healthier clients. c. it helps the government balance its budget. d. it provides for a single payer for all health insurance. 16. In an agency relationship, the ________ acts as an agent for the _________, the principal. a. b. c. d. insurer; government government; insurer provider; patient* patient; provider 17. In an agency relationship, the ________ acts as an agent for the _________, the principal. a. b. c. d. managed care administrator; patient* government; insurer insurer; government patient; provider 18. A managed care administrator is likely to: a. b. c. d. serve as an informed buyer for plan members.* refuse to allow necessary care. enforce governmental health care mandates. Answers (a) and (c) are correct. 19. Research shows that consumers ____ to price differentials because _____. a. b. c. d. do not respond; they have no information do not respond; they have insurance respond; they have some information* do not respond; HMOs provide all of their care 20.In general, increased information for consumers has the following impact on consumers’ quantity demanded: a. It makes it less responsive to price changes, because consumers trust their providers. b. It makes it more responsive to price changes, because consumers can shop among providers.* c. It has no impact on quantity demanded. d. It depends on the supply elasticity. 21. In processing quality ratings for HMOs, patients: a. b. c. d. pay little attention to ratings. react more strongly to positive ratings. react more strongly to negative ratings.* react symmetrically to both positive and negative ratings. 22. By the theory of reputation goods, an increased number of providers may lead to _____ prices because consumers have ______ information about alternatives and hence ____ elastic demand: a. b. c. d. lower; more; more higher; less; less* lower; less; more higher; more; more 23. Increased information ____ providers’ monopoly power, thus ____ the prices paid by clients. a. b. c. d. reduces; increasing increases; reducing increases; increasing reduces; reducing* 24. Pauly and Satterthwaite show that with an increase in the number of physicians, the average number of friends who see any provider diminishes. This, in turn, diminishes the average level of information available to consumers, leading to: a. b. c. d. lower quality of care. higher prices of care.* worse access to care. Answers (b) and (c) are correct. 25.If there is not perfect information: a. economic analysis will provide little help because its underlying assumptions are invalidated. b. goods of uncertain quality may enter the market.* c. firms will not engage in product innovation. d. physicians will serve as perfect agents for their patients. 26. Even though there may not be perfect information ________ may lead to the development of reasonably efficient markets: a. b. c. d. television advertising selective contracting by care managers a group of informed buyers* Answers (b) and (c) are correct. 27. Imperfect information has led for some economists to expect ________ in health care than in more competitive markets: a. b. c. d. higher quality lower quality more price dispersion* less price dispersion 28. In examining the demand for psychotherapy, Haas-Wilson found that consumers: a. b. c. d. have little information. will not purchase any psychotherapy services without insurance. only purchase through HMOs. respond to higher quality by paying more.* 29. Chou measured information on nursing homes by looking at: a. b. c. d. amount of advertising used. visits by family members.* referrals by physicians. Answers (a) and (b) are correct. 30. Studies have found that ______ quality providers are generally paid _______ prices. a. b. c. d. higher; lower higher; higher* lower; higher None of the above are correct. 31.In comparing high-price hospitals to low-price hospitals, the following is not true: a. b. c. d. High-price hospitals are larger. High-price hospitals have larger market shares. High-price hospitals perform better on popular rankings. High-price hospitals generally perform better on post-surgical death rates and serious blood clots among surgical discharges. * 32. A study of fertility clinics by Bundorf and colleagues found that would-be patients: a. b. c. d. were indifferent to the success rates of the clinics. increased their use of clinics with higher success rates.* increased their use of clinics with higher success rates only if they were insured. None of the above are correct. 33. Howard examined responses to quality in kidney transplant procedures. He found that a ___ increase in the one-year graft failure rate was associated with ____ in patient registrations at a major medical center. a. b. c. d. one standard deviation; a 6 percent reduction* one standard deviation; a 6 percent increase one unit; 5 unit decrease one-half percent; no change 34. A series of studies by the Institute of Medicine have found that about ____ deaths and ____ excess injuries occur each year due to problems with quality and safety. a. b. c. d. 10,000; 100,000 50,000; 500,000 100,000; 1,000,000* 200,000; 2,000,000 35. Under the Affordable Care Act, the practice of underwriting (charging more for higher-risk clients): a. b. c. d. is limited to new customers. is limited to those who buy insurance through their employers. is illegal.* will be phased out by the year 2020.