2/7/22, 2:54 PM Solved: Policy Application: Moral Hazard versus Adverse Selecti... | Chegg.

com

  Home Study tools

 My courses
 My books My folder Career Life 

Find solutions for your homework

Chapter 22, Problem 9ECE 1 Bookmark Search
Show all steps: ON

Your subscription will expire on Mar 06, 2022. Turn on auto-renew to keep accessing solutions.
Turn on auto-renew

home / study / business / business statistics / business statistics solutions manuals / microeconomics / 2nd edition / chapter 22 / problem 9ece

Microeconomics
(2nd Edition)
Post a question
Answers from our experts for your toug
homework questions

Enter question
Problem

Policy Application: Moral Hazard versus Adverse Selection in Health Care Reform: We Continue to post
mentioned moral hazard only briefly, and primarily in the context of how this might aggravate the 20 questions remaining
adverse selection problem. In this exercise, we explore moral hazard a bit more in the context of
health insurance. (Both part A and part B of this exercise can be done without having done
Section B in the chapter.)
My Textbook Solutions
A. Suppose throughout that individuals do not engage in riskier lifestyles as a result of obtaining
health insurance.

a. How does this assumption eliminate one form of moral hazard that we might worry about?

b. Suppose that a unit of health care x is such that it can be provided at constant marginal cost Microecono… Intermediate.. Forec
2nd Edition . Time
that is the same for all patients. Illustrate a patient’s demand curve for x as well as the MC curve
12th Edition 4th Ed
for providing x
View all solutions

c. Suppose demand for health care services is equal to marginal willingness to pay. If the patient
pays out-of-pocket for health care, how much would he or she consume assuming that health
care services are competitively priced (with health care providers facing negligible recurring fixed
costs)?

d. Suppose next that the patient has insurance coverage that pays for all health-related
expenses. How much x does he or she consume now?

e. Moral hazard refers to the change in behavior that arises once a person enters a contract.
Have you just uncovered a source of moral hazard in the health insurance market? Explain how
this results in inefficiency.

f. Now replicate your picture two times: Once for a patient where the moral hazard problem is
small, and once for a patient where it is large. If insurance companies cannot tell the difference
between these two individuals, how does this asymmetric information potentially give rise to
adverse selection?

B. Consider two alternative proposals for health care reform: Under proposal A, the government
mandates that everyone must buy health insurance, restricts insurance companies to provide a
single type of policy with generous benefits, and then lets the companies compete for customers
to sell that policy. Under proposal B, the government sets up “health care savings accounts” for
everyone and allows insurance companies to offer only policies with high “deductibles.” Under
this latter policy, consumers would then pay for most health-related expenditures using funds in
their health care savings accounts and could convert any balance to retirement accounts when
they reach the age of 65 (and thus become eligible for government health care for the elderly,
called Medicare in the United States). Insurance under policy B is therefore aimed only at
“catastrophic” events that cost more than the deductible of the policy.

https://www.chegg.com/homework-help/microeconomics-2nd-edition-chapter-22-problem-9ece-solution-9781305650466?trackid=7a9a0858e48b… 1/5
2/7/22, 2:54 PM Solved: Policy Application: Moral Hazard versus Adverse Selecti... | Chegg.com
a. Suppose you were concerned about excessive health care costs. How would the two different
 proposals
Homeaim at Study tools

addressing this?  My courses

 My books My folder Career Life 

Chapter 22, Problem 9ECE 1 Bookmark Show all steps: ON

b. If you thought the primary problem arose from the moral hazard analyzed in part A of this
exercise, which policy would you favor?

c. Suppose instead that you thought the primary problem arose from the rising cost of health
insurance linked to increasingly severe adverse selection (unrelated to the moral hazard problem
analyzed in part A) and a growing pool of uninsured people. Which policy might you more likely
favor?

Step-by-step solution

Step 1 of 10

Moral hazard:

Moral hazard is one of the asymmetric information problems in which one party to a contract can
take a hidden action that benefits that person at the expense of another party.

Comment

Step 2 of 10

A.

a.

According to the scenario, the situation of a moral hazard occurs when people change their
behavior after a contract has been entered. In this case, the over consumption of routine health
care is the behavior concerned once people are fully insured. Here, people do not face the actual
marginal cost of health care procedures.

Comment

Step 3 of 10

b.

Figure-1 shows the moral hazard and insurance market as follows:

In Figure-1, the horizontal axis represents the quantity and the vertical axis represents the price.

Comment

Step 4 of 10

c.

https://www.chegg.com/homework-help/microeconomics-2nd-edition-chapter-22-problem-9ece-solution-9781305650466?trackid=7a9a0858e48b… 2/5
2/7/22, 2:54 PM Solved: Policy Application: Moral Hazard versus Adverse Selecti... | Chegg.com
Suppose the demand for health care service is equal to marginal willingness to pay, the price
 would be
Home
equal toStudy tools
cost; My
the marginal courses

hence,
 My
the consumer willbooks
demand My
 folder
at quantity . Career Life 

CommentChapter 22, Problem 9ECE 1 Bookmark Show all steps: ON

Step 5 of 10

d.

Suppose the patients have insurance coverage that pays for health-related expenditure, the
patient would not pay for another service and the patient will consume things until their marginal
benefits equals to zero.

Comment

Step 6 of 10

e.

Suppose the behavior of individual changes, the patient will consume insurance at x* and ,
which implies that service is less than the cost.

Comment

Step 7 of 10

f.

Figure-2 shows the moral hazard and health insurance market situation as follows:

In Figure-2, the horizontal axis represents the quantity and the vertical axis represents the price.

Comment

Step 8 of 10

B.

a.

According to the scenario, people will bear the marginal cost of each health care process as they
would have to pay for it through their health savings account. In this way, the individual health
savings account addresses the moral hazard problem. According to the scenario, the insurance
companies have no ability to discriminateon the basis of prior health conditions. The prohibition
on insurance companies from discriminating may cause adverse selection problem. The adverse
selection is one of the asymmetric information. Therefore, healthy people know that they get
insurance only if they get sick. Therefore, mostly they will not prefer to purchase insurance. That
is, those who most likely purchase health insurance are those who are most likely to use it.

Comment

https://www.chegg.com/homework-help/microeconomics-2nd-edition-chapter-22-problem-9ece-solution-9781305650466?trackid=7a9a0858e48b… 3/5
2/7/22, 2:54 PM Solved: Policy Application: Moral Hazard versus Adverse Selecti... | Chegg.com

Step 9 of 10
  Home Study tools
 My courses
 My books My folder Career Life 

b.
Chapter 22, Problem 9ECE 1 Bookmark Show all steps: ON
Suppose the primary problem arose from the moral hazard analyzed in part A, the individual
would prefer policy B because it would eliminate moral hazard problem. Hence, people will insure
for their health.

Comment

Step 10 of 10

c.

In this case, policy A addresses the issue of higher cost in the health sector insurance policy,
which would cause to increase the competition, which drives down the price of the insurance
policy.

Comment

Was this solution helpful? 0 0

Recommended solutions for you in Chapter 22

Chapter 22, Problem 9ECE Chapter 22, Problem 6ECE

Policy Application: Moral Hazard versus Adverse Everyday Application: Non-Random “Selection” Is
Selection in Health Care Reform: We mentioned Everywhere: The problem in our initial discussion of
moral hazard only briefly, and... A-grade insurance markets...

See solution See solution

COMPANY

LEGAL & POLICIES

CHEGG PRODUCTS AND SERVICES

CHEGG NETWORK

CUSTOMER SERVICE

© 2003-2022 Chegg Inc. All rights reserved.

https://www.chegg.com/homework-help/microeconomics-2nd-edition-chapter-22-problem-9ece-solution-9781305650466?trackid=7a9a0858e48b… 4/5
2/7/22, 2:54 PM Solved: Policy Application: Moral Hazard versus Adverse Selecti... | Chegg.com

  Home Study tools

 My courses
 My books My folder Career Life 

Chapter 22, Problem 9ECE 1 Bookmark Show all steps: ON

https://www.chegg.com/homework-help/microeconomics-2nd-edition-chapter-22-problem-9ece-solution-9781305650466?trackid=7a9a0858e48b… 5/5