Question

1. The provision of free or subsidized public housing will always increase the amount of housing consumed by program participants. A) True. B) False.

2. Most experts believe that the cost of living adjustment for social security retirees understates the true impact of inflation on the elderly: A) True. B) False.

3. A 50 percent copayment (coinsurance charge) will reduce the efficiency loss (welfare cost) resulting from the moral hazard problem by approximately 50 percent. A) True. B) False.

Answer 1

1. FALSE. If the effect of subsidy is not passed on to the customers, then the amount of housing consumed may not increase. For eg. Say the supply of housing remains constant, and there are subsidies introduced, then the housing prices may go up by the same amount, keeping the amount of housing consumed constant.

2. TRUE. Cost of living adjustment understates the true impact of inflation, as once in a while unexpected inflation distorts the equation.

3. TRUE. Copayment is the part of the amount paid by the healthcare beneficiary. Rest amount is paid by the insurer. Moral hazard is the lack of incentive to guard against risk which gives rise to efficiency loss. Copayment can help reduce this efficiency loss.