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EC248 Exam Prep Questions Solved 100% Correct
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EC248 Exam Prep Questions Solved 100% Correctwhat happens to frail/robust individuals when firms cannot distinguish frail individuals
from robust? - ✔frail ppl will recieve full insurance at an actuarially fair price,
robust ppl will recieve contracts that are not as full as theyd like, "quantity constrained"
3 solutions for adverse selection - ✔1. lifetime insurance contracts: cx's pool together at age
18 and sign lifelong insurance contracts: this creates antagonistic relationships and may
be legally unenforceable
2. guaranteed renewable contract: insurance contracts are frontloaded so that R's and F's
voluntarily remain in the contract: cx's cant switch insurers, so this creates no competitive
pressure.
3. cochrane lifetime contract: insurers provide premium insurance
Asymmetric information Models make 3 assumptions about these markets - ✔1. Positive
correlation between risk/coverage: rothschild-stiglitz: high-risk get full insurance, low-risk
recieve incomplete insurance
2. bulk markups: used by insurers to protect themselves
from risky cx's who want a lot of insurance
3. adverse selection death spiral: if R's and F's are pooled together, R's will leave the pool
viatical settlements: - ✔when a firm buys a life insurance contract from someone and
collects the payout when they die.
Was not as popular as estimated during the 90s with HIV ppl
, 4 reasons why adverse selection would not work - ✔1. cx's misperceive their own risk: ppl
think they are healthier than they actually are
2. cx's do not act on their own private information: real cx's have more to worry about than
a small bargain on insurance, ppl fail to realize their advantages, ie calculating annual
milelage when buying auto insurance
3. insurers can accurately observe cx risks: long-term care insurers with access to historical data
are better at predicting if someone needs longterm care
4. "advantageous selection" sometimes it is healthier, less risky ppl who buy insurance.
arrow's impossibility theorem - ✔it does not make sense to speak of an "optimal" health
policy for a country because societies may not have the preferences that can be optimized in
the traditional sense
3 things in the health policy trilemma - ✔health, wealth, and equity
three broad questions that any national health care system must answer - ✔1. how
should insurance markets work?
2. how should moral hazard be controlled in public insurance?
3. how should health care provider markets be regulated?
5 options of health insurance markets - ✔1. Private insurance markets (only frails become
insured, minimizes gov't involvement but maximizes adverse selection, many citizens cannot
get full insurance)
2. Universal public insurance (insurance provided to everyone, paid for by taxes, which will
end adverse selection/uninsurance. but moral hazard can explode. taxes will go up and distort
markets, entire economy could be less efficient)
3. Compulsory insurance (mandate requires everyone to buy private insurance, bans adverse
selection. but the gov't still has to regulate it, and poor ppl might not be able to afford it so they
would need subsidies. mandates need to be well defined or it may be completely ineffective)
4. Employer-sponsored insurance (employers provide private insurance to their employees,
healthy employees pool with unhealthy to mitigate adverse selection, but this can create
labour market inefficiencies and does not help the unemployed)
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