Suppose a large firm allows its employees to choose whether to participate in its health insurance plan.
The firm is trying to decide between two plans: Plan I has a low monthly premium but a high deductible, and Plan II has a high monthly premium but a low deductible. Under which plan is adverse selection likely to be a bigger problem?
A) Plan II because it is likely to draw participants who expect high medical costs. Healthy individuals who do not expect to consume much health care services will not be willing to pay the high premiums.
B) Plan II because it is likely to draw employees who tend to over-consume health care services because of the low deductible. Insurance companies are likely to end up paying out more claims than the premiums they collect.
C) Plan I because it is likely to draw the relatively healthy employees who do not expect to spend much on health care. Because the monthly premiums are low, the insurance company has to bear a bigger financial burden in the event of serious illnesses.
D) Plan I because it is likely to draw participants who expect high medical costs. This group expects to consume much health care services and therefore prefer low deductibles.
Question 2
If Japanese workers are more productive than French workers then trade between Japan and France
A) cannot take place because Japanese goods and services will be less expensive than French goods and services.
B) can take place only if France has an absolute advantage in producing a good or service Japanese buyers want.
C) will take place so long as each country has a comparative advantage in a good or service that buyers in the other country want.
D) cannot take place until French workers become more productive.
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