An insurance company finds that it insured an adverse selection of largely ill patients. It is ...

[Answer to ques. #1]  As insurance premiums increase healthy enrollees are more likely to drop out of the plan. They might opt for cheaper, less generous health insurance plans or for self-insurance. This tendency further aggravates the adverse selection problem.

[Answer to ques. #2]  Interest rates reflect peoples' preference for consumption goods that are available immediately (or sooner) over goods that are only available later. They also reflect the productivity of investment as savings are used to purchase capital goods that produce output over longer spans of time. Interest is an opportunity cost. Investments that produce income over the future must entail forgone consumption in the present.

[Answer to ques. #3]  TRUE

[Answer to ques. #4]  Health care is certainly a necessity in almost all cases. However, based on budget or income limitations, it may not be possible for some consumers to afford certain services at higher price levels. Thus demand for health care would be very inelastic - in the range of 0.2 - but not perfectly inelastic at 0.0.

[Answer to ques. #5]  C

[Answer to ques. #6]  FALSE

[Answer to ques. #7]  Though government programs are introduced to benefit the relatively poor, some programs tend to have unintended consequences, that helps the affluent class more than the low-income sections. For instance, support for public universities helps the middle or upper income groups more than the poor. Agricultural subsidies help farmers who already have an established business and a much larger income than poorer farmers.