MHA710 | MHA710 Healthcare Economics Final
Exam v2 Questions with Correct Answers and
Expert Explanation for Each Question
1. Which economic concept explains why individuals consume more healthcare
services when they have insurance coverage compared to when they are uninsured?
A. Moral hazard
B. Adverse selection
C. Externalities
D. Monopoly power
Correct Answer: A
Expert Explanation: Moral hazard refers to the change in behavior that occurs
when a person is insulated from risk. In healthcare, it specifically describes the
tendency for insured individuals to utilize more medical services because their out-
of-pocket cost is lower than the actual cost of care. This concept is fundamental to
understanding why insurance companies implement cost-sharing measures like
deductibles and copayments.
2. In the context of the Grossman Model of health demand, how is health primarily
viewed?
A. As a purely consumption good with no investment value.
,B. As a public good provided solely by the government.
C. As a random variable that cannot be influenced by individual choice.
D. As a capital stock that yields ‘healthy time’ as an output.
Correct Answer: D
Expert Explanation: The Grossman Model treats health as a durable capital stock
that produces an output of healthy time. Individuals invest in this stock through
medical care, exercise, and diet while health depreciates over time due to aging. This
economic framework helps explain how education and income influence the
production of health throughout a person’s life.
3. Which of the following best describes ‘Adverse Selection’ in the health insurance
market?
A. Doctors prescribing more tests than necessary to increase revenue.
B. Insurance companies refusing to cover pre-existing conditions.
C. High-risk individuals being more likely to purchase insurance than low-risk
individuals.
D. The government mandating that everyone must have health insurance.
Correct Answer: C
,Expert Explanation: Adverse selection occurs when there is asymmetric
information between the buyer and the seller of insurance. Individuals with higher
health risks are more likely to seek coverage, while healthier individuals may opt
out, potentially leading to a ‘death spiral’ of rising premiums. This market failure is
often addressed through community rating and individual mandates.
4. What does the ‘Price Elasticity of Demand’ measure in healthcare?
A. The change in supply when prices for medical equipment increase.
B. The total revenue generated by a hospital after a price hike.
C. The responsiveness of the quantity of healthcare demanded to a change in its
price.
D. The degree of competition among pharmaceutical companies.
Correct Answer: C
Expert Explanation: Price elasticity of demand calculates the percentage change in
quantity demanded divided by the percentage change in price. In healthcare,
demand is generally considered inelastic because many services are life-saving or
necessary, meaning consumers don’t significantly reduce usage when prices rise.
Understanding this elasticity helps policymakers predict the impact of changing
copayments on service utilization.
, 5. Which situation illustrates ‘Supplier-Induced Demand’ (SID)?
A. Patients requesting more antibiotics for a viral infection.
B. A physician recommending additional tests primarily to increase their own
income.
C. An increase in hospital visits during a flu pandemic.
D. Pharmaceutical companies raising prices on life-saving drugs.
Correct Answer: B
Expert Explanation: Supplier-induced demand occurs when a provider uses their
superior medical knowledge to influence a patient’s demand for care in a way that
benefits the provider financially. This phenomenon typically happens in fee-for-
service environments where physicians have an incentive to increase volume. It
represents a deviation from the traditional economic assumption that demand is
independent of supply.
6. What is the primary goal of a ‘Cost-Effectiveness Analysis’ (CEA) in healthcare?
A. To maximize the profits of private hospitals.
B. To ensure that all medical services are provided free of charge.
C. To compare the relative costs and outcomes of different medical interventions.
D. To eliminate all waste in the Medicare administration process.
Exam v2 Questions with Correct Answers and
Expert Explanation for Each Question
1. Which economic concept explains why individuals consume more healthcare
services when they have insurance coverage compared to when they are uninsured?
A. Moral hazard
B. Adverse selection
C. Externalities
D. Monopoly power
Correct Answer: A
Expert Explanation: Moral hazard refers to the change in behavior that occurs
when a person is insulated from risk. In healthcare, it specifically describes the
tendency for insured individuals to utilize more medical services because their out-
of-pocket cost is lower than the actual cost of care. This concept is fundamental to
understanding why insurance companies implement cost-sharing measures like
deductibles and copayments.
2. In the context of the Grossman Model of health demand, how is health primarily
viewed?
A. As a purely consumption good with no investment value.
,B. As a public good provided solely by the government.
C. As a random variable that cannot be influenced by individual choice.
D. As a capital stock that yields ‘healthy time’ as an output.
Correct Answer: D
Expert Explanation: The Grossman Model treats health as a durable capital stock
that produces an output of healthy time. Individuals invest in this stock through
medical care, exercise, and diet while health depreciates over time due to aging. This
economic framework helps explain how education and income influence the
production of health throughout a person’s life.
3. Which of the following best describes ‘Adverse Selection’ in the health insurance
market?
A. Doctors prescribing more tests than necessary to increase revenue.
B. Insurance companies refusing to cover pre-existing conditions.
C. High-risk individuals being more likely to purchase insurance than low-risk
individuals.
D. The government mandating that everyone must have health insurance.
Correct Answer: C
,Expert Explanation: Adverse selection occurs when there is asymmetric
information between the buyer and the seller of insurance. Individuals with higher
health risks are more likely to seek coverage, while healthier individuals may opt
out, potentially leading to a ‘death spiral’ of rising premiums. This market failure is
often addressed through community rating and individual mandates.
4. What does the ‘Price Elasticity of Demand’ measure in healthcare?
A. The change in supply when prices for medical equipment increase.
B. The total revenue generated by a hospital after a price hike.
C. The responsiveness of the quantity of healthcare demanded to a change in its
price.
D. The degree of competition among pharmaceutical companies.
Correct Answer: C
Expert Explanation: Price elasticity of demand calculates the percentage change in
quantity demanded divided by the percentage change in price. In healthcare,
demand is generally considered inelastic because many services are life-saving or
necessary, meaning consumers don’t significantly reduce usage when prices rise.
Understanding this elasticity helps policymakers predict the impact of changing
copayments on service utilization.
, 5. Which situation illustrates ‘Supplier-Induced Demand’ (SID)?
A. Patients requesting more antibiotics for a viral infection.
B. A physician recommending additional tests primarily to increase their own
income.
C. An increase in hospital visits during a flu pandemic.
D. Pharmaceutical companies raising prices on life-saving drugs.
Correct Answer: B
Expert Explanation: Supplier-induced demand occurs when a provider uses their
superior medical knowledge to influence a patient’s demand for care in a way that
benefits the provider financially. This phenomenon typically happens in fee-for-
service environments where physicians have an incentive to increase volume. It
represents a deviation from the traditional economic assumption that demand is
independent of supply.
6. What is the primary goal of a ‘Cost-Effectiveness Analysis’ (CEA) in healthcare?
A. To maximize the profits of private hospitals.
B. To ensure that all medical services are provided free of charge.
C. To compare the relative costs and outcomes of different medical interventions.
D. To eliminate all waste in the Medicare administration process.
