MHA710 Healthcare Economics Final Exam v1
Questions with Correct Answers and Expert
Explanation for Each Question
1. Which economic concept describes the value of the best alternative forgone when a choice
is made in healthcare resource allocation?
A. Sunk cost
B. Marginal utility
C. Variable cost
D. Opportunity cost
Correct Answer: D
Expert Explanation: Opportunity cost is the benefit that is missed out on when one
alternative is chosen over another. In healthcare, this means resources spent on one
treatment cannot be used for another preventative measure. Understanding this concept is
vital for managing limited budgets in hospital settings.
2. In the context of health insurance, what does the term ‘Moral Hazard’ refer to?
A. The administrative costs associated with processing claims
B. The tendency for high-risk individuals to seek insurance more than low-risk individuals
C. The refusal of insurance companies to cover pre-existing conditions
D. The change in behavior that occurs when an individual is insulated from the full cost of a
risk
,Correct Answer: D
Expert Explanation: Moral hazard occurs when individuals utilize more healthcare
services because they do not bear the full cost of those services. This behavior leads to
increased spending and can lead to inefficiencies in the insurance market. To combat this,
insurers often implement cost-sharing mechanisms like deductibles and copayments.
3. Which of the following describes ‘Adverse Selection’ in the health insurance market?
A. Low-risk individuals leaving the insurance pool because premiums are too high
B. Insurers choosing only the healthiest patients to cover
C. Physicians recommending more tests than necessary to increase revenue
D. Patients choosing the cheapest plan available regardless of quality
Correct Answer: A
Expert Explanation: Adverse selection happens when there is asymmetric information
between the buyer and the seller. If premiums are set based on average risk, low-risk
people may opt out, leaving only high-risk people in the pool. This dynamic often leads to a
‘death spiral’ where premiums rise continually to cover the increasing average costs.
4. What is the primary focus of the Grossman Model of health demand?
A. The relationship between hospital competition and price
B. The impact of pharmaceutical patents on innovation
C. The demand for health as a capital good and a consumption good
, D. The efficiency of government-run versus private health systems
Correct Answer: C
Expert Explanation: The Grossman model views health as a form of human capital that
depreciates over time and can be improved through investment. Individuals demand health
because it makes them feel better and increases their productive time. This model helps
economists understand why people choose to invest in healthy lifestyles and medical care.
5. If the price elasticity of demand for a specific medical procedure is -0.2, the demand is
considered:
A. Elastic
B. Inelastic
C. Unit elastic
D. Perfectly elastic
Correct Answer: B
Expert Explanation: When the absolute value of price elasticity is less than 1, demand is
categorized as inelastic. This suggests that patients are not very sensitive to price changes
for this specific procedure. Many essential healthcare services exhibit inelastic demand
because there are few substitutes and the need is urgent.
6. The ‘Principal-Agent Problem’ in healthcare usually describes the relationship between:
A. The patient and the physician
Questions with Correct Answers and Expert
Explanation for Each Question
1. Which economic concept describes the value of the best alternative forgone when a choice
is made in healthcare resource allocation?
A. Sunk cost
B. Marginal utility
C. Variable cost
D. Opportunity cost
Correct Answer: D
Expert Explanation: Opportunity cost is the benefit that is missed out on when one
alternative is chosen over another. In healthcare, this means resources spent on one
treatment cannot be used for another preventative measure. Understanding this concept is
vital for managing limited budgets in hospital settings.
2. In the context of health insurance, what does the term ‘Moral Hazard’ refer to?
A. The administrative costs associated with processing claims
B. The tendency for high-risk individuals to seek insurance more than low-risk individuals
C. The refusal of insurance companies to cover pre-existing conditions
D. The change in behavior that occurs when an individual is insulated from the full cost of a
risk
,Correct Answer: D
Expert Explanation: Moral hazard occurs when individuals utilize more healthcare
services because they do not bear the full cost of those services. This behavior leads to
increased spending and can lead to inefficiencies in the insurance market. To combat this,
insurers often implement cost-sharing mechanisms like deductibles and copayments.
3. Which of the following describes ‘Adverse Selection’ in the health insurance market?
A. Low-risk individuals leaving the insurance pool because premiums are too high
B. Insurers choosing only the healthiest patients to cover
C. Physicians recommending more tests than necessary to increase revenue
D. Patients choosing the cheapest plan available regardless of quality
Correct Answer: A
Expert Explanation: Adverse selection happens when there is asymmetric information
between the buyer and the seller. If premiums are set based on average risk, low-risk
people may opt out, leaving only high-risk people in the pool. This dynamic often leads to a
‘death spiral’ where premiums rise continually to cover the increasing average costs.
4. What is the primary focus of the Grossman Model of health demand?
A. The relationship between hospital competition and price
B. The impact of pharmaceutical patents on innovation
C. The demand for health as a capital good and a consumption good
, D. The efficiency of government-run versus private health systems
Correct Answer: C
Expert Explanation: The Grossman model views health as a form of human capital that
depreciates over time and can be improved through investment. Individuals demand health
because it makes them feel better and increases their productive time. This model helps
economists understand why people choose to invest in healthy lifestyles and medical care.
5. If the price elasticity of demand for a specific medical procedure is -0.2, the demand is
considered:
A. Elastic
B. Inelastic
C. Unit elastic
D. Perfectly elastic
Correct Answer: B
Expert Explanation: When the absolute value of price elasticity is less than 1, demand is
categorized as inelastic. This suggests that patients are not very sensitive to price changes
for this specific procedure. Many essential healthcare services exhibit inelastic demand
because there are few substitutes and the need is urgent.
6. The ‘Principal-Agent Problem’ in healthcare usually describes the relationship between:
A. The patient and the physician
