The homework covers the textbook Ch 1~3, and 5. You may discuss the questions with classmates. However, it must be your individual work. Copying answer from others will violate ACADEMIC HONESTY policy to cause a failing grade. Please show the derivation process and limit your answers within 5 pages. Highlight the answer for each question in MS Word format. No cover sheet is required. If you don’t know how to edit math notations, just explain the process. Please submit you solution file as an attachment.
Q1: (Chapter 1 Appendix) (15%)
Suppose a health expenditure function is specified in the following manner: E = 1500 + 0.6Y,
where E represents annual health care expenditures per capita and Y stands for income per capita.
- Using the slope of the health expenditure function, predict the change in per capita health care expenditures that would result from a $1,000 increase in per capita income.
- Compute the level of per capita health care spending when per capita income takes on the following dollar values: 0; 1,000; and 4,000.
- Now assume that the fixed amount of health care spending remains at $1,500 but the slope parameter on income decreases to 0.3. Graph both the original and new health care expenditure functions. Explain the relation the two lines.
Q2: (Chapter 1 Appendix) (10%)
Victor Fuchs (1996) lists the following questions in an article in The Wall Street Journal. Identify whether the following questions involve positive or normative analysis. All the questions deal with a Republican plan to reform Medicare, the public health insurance program for the elderly.
- Should seniors who use less care benefit financially, or should they subsidize those who use more care?
- What effect will these changes have on utilization?
- How many Medicare beneficiaries will switch to managed care?
- If the rate of spending growth is reduced to 6 percent from 10 percent a year, what will happen to the growth of medical services?
- Will senior citizens’ choices about types of coverage depend on their health status? Q3: (Chapter 2) (15%)
Explain how a change (upward shift or downward shift) in each of the following factors would alter the shape of the total product curve for medical care.
- An increase of education spending.
- An improvement in lifestyle.
- An improvement in the environment.
Q4: (Chapter 2) (10%)
Some people believe cigarette and alcohol advertisements should be banned completely in the United States. If this were the case, what would likely happen to the shapes of the total and marginal product for medical care (upward shift or downward shift)?
Q5: (Chapter 3) (10%)
According to Chase (1993), TPA, a heart drug produced by Genentech Inc., costs ten times more at $2,200 a dose than streptokinase, an alternative heart drug sold by Astra AB and Kabi Farmacia AB of Sweden and by Hoechst AG of Germany. A trial of 41,000 heart attack patients found that the TPA treatment saves 1 more life out of 40 than streptokinase does. Assume that a person pays full cost for either drug and chooses TPA over streptokinase. Another otherwise identical person makes the opposite choice. Use the willingness-to-pay approach to calculate the difference in the value of their lives (assume that dosage requirements are the same).
Q6: (Chapter 3) (15%)
Given this information, answer the following questions.
| Cost | Effectiveness | |
| Current Treatment | $150,000 | 5 life-years gained |
| New Treatment | $250,000 | 10 life-years gained |
- Calculate the ICER for the new treatment, assuming that the new treatment would replace the old one.
- In which quadrant (on Lecture Ch 2-3, slide #35) is the ICER located? Is cost effectiveness analysis relevant? C. How does the answer change if the cost of the new treatment equals $75,000?
Q7: (Chapter 5) (10%)
Describe the demand curve shift (rightward or leftward) about how the following changes would affect the demand for inpatient services at a hospital in a large city.
- The hospital relocates from the center of the city to a suburb, where the population is much less than metropolitan area.
- A number of physicians in the area join together and open up a discount-price walk-in clinic; the cross-price elasticity of demand between physician services and inpatient hospital services is ─0.50.
Q8: (Chapter 5) (5%)
In reaction to higher input costs, a physician decides to increase the average price of a visit by 10 percent. Will total revenues increase or decrease as a result of this action? Use the concept of price elasticity to substantiate your answer.
Q9: (Chapter 5) (10%)
You are employed as an economic consultant to the regional planning office of a large metropolitan area, and your task is to estimate the demand for hospital services in the area. Your estimates indicate that the own-price elasticity of demand equals –0.25, the income elasticity of demand equals 0.45, the cross-price elasticity demand for hospital services with respect to the price of nursing home services equals –0.1, and the elasticity of travel time equals –0.42. Use this information to project the impact (i.e. how many percent) of the following changes on the quantity demanded for hospital services.
- Average travel time to the hospital diminishes by 5 percent due to overall improvement in the public transportation system.
- The price of nursing home care decreases by 15 percent.
- Average real income decrease by 8 percent.
- The hospital is forced to increase its price for service by 4 percent.
