Question

For each of the following statements, say whether it is true, false, or ambiguous. Then, write a brief explanation for your answer.

If a person’s expected wealth without health insurance is $100, 000 and $80, 000 with health insurance, then they will receive a higher utility from choosing to be uninsured.

A partial but fair insurance contract is preferable to a full but unfair insurance contract.

An insurance policy that creates moral hazard should be prohibited.

The Grossman model would predict that the effect of a recession on an individual’s optimal health stock would be ambiguous.

Preventative health care is more price sensitive than in-patient health care.

A patient going to the doctor for more physicals because they’re now on health insurance is an example of ex ante moral hazard.

Answer 1

The expected wealth versus utility statement is false; insurance value includes risk reduction. The preference for insurance contracts is ambiguous and depends on individual choice. Moral hazard shouldn't necessarily result in prohibition but rather structural policy adjustments.

Step-by-step explanation:

For the statement regarding expected wealth with and without health insurance influencing utility, the statement can be considered false. Utility is not solely based on wealth, as it also includes the value of risk reduction which insurance provides.

The preference between a partial but fair insurance contract and a full but unfair one tends to be ambiguous. It depends on individual preferences for fairness versus coverage.

Regarding policies that create a moral hazard, it is not automatically true that they should be prohibited. Instead, the policy structure could be adjusted to mitigate moral hazard, such as through deductibles and copays.

The Grossman model's prediction of health stock during a recession is indeed ambiguous. Economic constraints may reduce healthcare expenditure, but the desire to maintain health might cause people to prioritize their health spending differently.

Preventative health care is generally more price sensitive than in-patient care due to the less urgent nature of the service and the higher elasticity of demand.

Finally, a patient going to the doctor for more physicals due to having insurance is an example of ex ante moral hazard. This is when insurance coverage leads to increased consumption of healthcare services.