Problems

10 . In an insurance system, would you expect each person to receive in benefits pretty much what they pay in premiums or is it just that the average benefits paid will equal the average premiums paid? 11 . What is an actuarially fair insurance policy? 12 . What is the problem of moral hazard? 13 . How can moral hazard lead to more costly insurance premiums than one was expected? 14 . Define deductibles, copayments, and coinsurance. 15 . How can deductibles, copayments, and coinsurance reduce moral hazard? 16 . What is the key difference between a fee-for-service healthcare system and a system based on health maintenance organizations? 17 . How might adverse selection make it difficult for an insurance market to operate? 18 . What are some of the metrics economists use to measure health outcomes?

Critical Thinking Questions

19 . You are on the board of directors of a private high school, which is hiring new tenth-grade science teachers. As you think about hiring someone for a job, what are some mechanisms you might use to overcome the problem of imperfect information? 20 . A website offers a place for people to buy and sell emeralds, but information about emeralds can be quite imperfect. The website then enacts a rule that all sellers in the market must pay for two independent examinations of their emerald, which are available to the customer for inspection. a. How would you expect this improved information to affect demand for emeralds on this website? b. How would you expect this improved information to affect the quantity of high-quality emeralds sold on the website? 21 . How do you think the problem of moral hazard might have affected the safety of sports such as football and boxing when safety regulations started requiring that players wear more padding? 22 . To what sorts of customers would an insurance company offer a policy with a high copay? What about a high premium with a lower copay?

Problems

23 . Using Exercise 16.20, sketch the effects in parts (a) and (b) on a single supply and demand diagram. What prediction would you make about how the improved information alters the equilibrium quantity and price? 24 . Imagine that you can divide 50-year-old men into two groups: those who have a family history of cancer and those who do not. For the purposes of this example, say that 20% of a group of 1,000 men have a family history of cancer, and these men have one chance in 50 of dying in the next year, while the other 80% of men have one chance in 200 of dying in the next year. The insurance company is selling a policy that will pay $100,000 to the estate of anyone who dies in the next year. a. If the insurance company were selling life insurance separately to each group, what would be the actuarially fair premium for each group? b. If an insurance company were offering life insurance to the entire group, but could not find out about family cancer histories, what would be the actuarially fair premium for the group as a whole? c. What will happen to the insurance company if it tries to charge the actuarially fair premium to the group as a whole rather than to each group separately?

FIGURE 17.1Building Home EquityMany people choose to purchase their home rather than rent. This chapter explores how the global financial crisis has influenced home ownership. (Credit: “red sold sign” by Diana Parkhouse/ Flickr Creative Commons, CC BY 2.0)

In this chapter, you will learn about:

• How Businesses Raise Financial Capital
• How Households Supply Financial Capital
• How to Accumulate Personal Wealth

BRING IT HOME The Housing Bubble and the 2007 Financial Crisis In 2006, housing equity in the United States peaked at $13 trillion. That means that the market prices of homes, less what was still owed on the loans they used to buy these houses, equaled $13 trillion. This was a very good number, since the equity represented the value of the financial asset most U.S. citizens owned. However, by 2008 this number declined to $8.8 trillion, and it plummeted further still in 2009. Combined with the decline in value of other financial assets held by U.S. citizens, by 2010, U.S. homeowners’ wealth had shrunk $14 trillion! This is a staggering result, and it affected millions of lives: people had to alter their retirement, housing, and other important consumption decisions. Just about every other large economy in the world suffered a decline in the market value of financial assets, as a result of the 2008-2009 global financial crisis. This chapter will explain why people purchase houses (other than as a place to live), why they buy other types of