Economics 236 - Health Economics & Policy Problem Set 1
Give clear, well written answers to the questions that follow below. Use full sentences, carefully thought out economic arguments, and well labeled graphs were appropriate. Be concise and to the point, but do discuss all important and relevant information.
1) Agree or disagree; EXPLAIN your answer. (Use 1-2 paragraphs to answer each one of these questions.)
a) Most of the increase in medical care spending over the past 40 years has been due to general inflation.
b) People living in Boston are hospitalized about 1.5 times as often as those living in New Haven, yet their health outcomes appear to be identical. This means that hospital care has no ability to improve health.
c) Variations in the average rate of medical care use across regions mostly reflect differences in sickness and/or insurance coverage.
d) The RAND Health Insurance Experiment can't show anything about the effect of price upon medical care use because the experiment design was flawed; they gave every participant enough money at the beginning of each year so that they could pay for all possible out of pocket medical care with the "up front money". Therefore, everybody in the experiment effectively had full coverage, and the experiment wasn't an experiment.
2) In two separate diagrams using demand curves, carefully draw (a) the effect of an insurance plan that covers 50% of all services purchased; (b) the effect of an insurance plan that pays $25 per doctor visit. Assume in both cases that doctors provide medical services at a constant price of $30 per visit. (Please realize that you only have enough information for a careful sketch but not an exact graph.)
3) Suppose that the demand for dental visits is given by: Q = 1000 - 15 P, where Q is the quantity of visits and P is the price.
a) What is the quantity consumed at P = 50?
b) Plot this demand curve and explain what the effect would be of an increase in the quality of dental visits. What if the increased quality of visits is unobservable to the consumer (patient)?