Econ 344
Problem Set #3
Assigned: Th. Feb. 23, 2012
Due: Th. Mar. 1, 2012
Corresponding Chapters: Gruber 12-14
Part I Multiple Choices (3*12=36 points)
1. When people behave in ways that involve increased risk because they have insurance, this is known as
a) adverse selection.
b) moral hazard.
c) asymmetric information.
d) a HMO.
2 Health care markets may be inefficient because of
a) poor information.
b) adverse selection.
c) moral hazard.
d) all of the above.
e) none of the above.
3 An actuarially fair return means
a) returns on investments are indexed to the stock market.
b) returns on investments have to be positive.
c) benefits received, on average, would be equal to the premiums paid.
d) premiums for insurance are generally paid by the government.
e) none of the above.
4 When the average buyer of an insurance policy is likely to have higher risk than others in his class, this is known as
a) adverse selection.
b) moral hazard.
c) asymmetric information.
d) a HMO.
e) none of the above.
5. Asymmetric information generally implies
a) information between parties is not equal.
b) all parties are fully informed.
c) information is costless.
d) information is too costly to transmit.
e) a and c.
6. Which of the following is a moral hazard effect of Social Security?
a. Retirees die sooner than they would without Social Security.
b. Workers retire sooner than they would without Social Security.
c. Retirees buy less health insurance than they would without Social Security.
d. Workers work longer and become more unhealthy than they would without Social Security.
e. Retirees suffer on-the-job injuries more as a result of Social Security.
7. Which of the following was a recommendation or action of the Greenspan Commission in 1983?
a. Social Security benefits should be cut.
b. Social Security benefits should be means-tested to a greater degree.
c. Individuals should be able to put their taxes into private retirement accounts.
d. Both a and b are correct.
e. Both b and c are correct.
8. Which of the following is consistent with there being a moral hazard effect of workers' compensation(WC)?
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
9. A pay-as-you-go system means
a. you pay for your dinner as you go to the table to eat.
b. current working citizens pay for current retired citizens.
c. there is no need for taxes since current workers pay for current retirees.
d. retirees are paid from accounts that have accumulated with interest over their working lives.
e. all of the above.
10. By providing a fixed level of education, the government intervention can lead to which of the following?
a. crowding out of private spending
b. an increase in total spending on a child’s education
c. a reduction of total spending on a child’s education
d. all of the above are correct
e. both a and b are correct
11. If a politician were to suggest that Social Security benefits should be means-tested, which of the following approaches is that politician suggesting?
a. Raising taxes
b. Extending the base of taxable wages
c. Raising the retirement age
d. Lowering benefits for all recipients
e. Lowering benefits for higher-income groups
True/False/Uncertain----explain if uncertain or false
12. T F U Having a Social Security program makes people less inclined to save for their own retirement.
III. Open questions
1. Ch 13. (10pts) What are the political and economic ramifications of investing a large part of the Social Security trust fund in the stock market, as has been recently proposed?
2. Ch13#4. (10 pts.) Suppose the Social Security payroll tax were increased to 16.4% in order to solve the pending fiscal imbalance in the program. Explain the effect of this change on the value of the Social Security program for people of different ages, earning levels and gender.
3. Expected utility of insurance. (18 pts.) Johnny is considering whether to buy health insurance. His utility is given by U(I)= √I where I is his yearly income equal to $25,000. However there is a 5% chance that he’ll fall sick with a avian flu virus which will cost him $5000.
a. What is his expected utility of not buying any insurance?
b. What is the actuarially fair premium for the health insurance in this case?
c. Assuming that the premium is actuarially fair, what is the expected utility associated with buying full insurance (ie insuring all $5,000 of potential loss)? What is the expected utility associated with insuring only half of the loss ($2500)? Is Johnny going to choose full insurance or partial insurance?
4. Social Security Reform (12 pts.)
a. What is the difference between pay as you go and fully funded social security systems? What is the reason Social security may be in trouble?
b. Name at least three incremental reform proposals
c. Name at least two fundamental reform proposals and briefly discuss the problems associated with each.
d. Do you think making social security voluntary will work? Explain
.
5. Ch.14 (14 pts)
You are hired by the administration to review the unemployment insurance (UI) program, which currently replaces approximately 45% of a workers wages for 26 weeks after she loses her job. Consider tow alternative reforms of the current UI system. The first is to experience-rate firms fully, so that the taxes firms pay are set exactly equal to the benefits their workers receive (benefits remain at 45%of wages). The second is a system of individual full experience ratings--- the government would loan individuals 45% of their wages while unemployed, but they would have to pay this back when they get new jobs.
a. Contrast the effects of these alternative policies on unemployment durations and the likelihood of worker layoffs.
b. What are the consumption-smoothing properties of each alternative policy?