Questions and Answers of The Economics Of Health And Health Care

“Medical interventions were not important in the historical declines in mortality rates, but that does not imply that medical research was unimportant.” Explain this viewpoint.
What role did public health play in the historical decline in mortality rates?
Suppose you were hired as an adviser to a developing country and you were versed in the theory of production, the historical role of medicine, and the modern-day health production function studies.
Someone says the following: “Lifestyle may be the most important determinant of health status, but changing lifestyles may not be the least costly way to improve population health status.”
Summarize the two theories on how schooling is correlated with health status. Which of the two theories does the evidence support?
Research shows that the returns for prenatal health care are high, whereas it may cost hundreds of thousands of dollars to keep an acutely ill, elderly person alive. What does this suggest about the
What is the total contribution of health care to health as estimated by researchers? What parts of health care are most effective in this regard?
Graph the production of health function HS = 10HC0.5 E0.3 LS0.4 HB0.2 in a graph with axes HS and HC , assuming E = 10, LS = 5, and HB = 7. Graph the marginal product of health inputs. Is it
Which factors in Table 5.4 were important in explaining improvements in black neonate mortality rates? White neonate mortality rates? Speculate on why some of these factors may have been more
What are the differences between mortality and morbidity? Would you expect the two variables to be related to each other? If so, how?
We know that correlations never explain; it is our theories that provide explanations.Re-examine Table 5.4 and draft theories to explain why WIC has a larger contribution than Organized Family
Pritchett and Summers argue that income per capita is strongly and positively related to health status when viewed across the world. From data in Table 2.2, in Chapter 2 of this text, plot a graph of
Explain whether there is any difference between goals in maximizing output for a given cost or minimizing the cost of producing a given level of output.
What are cross-sectional data? Why do economists fi nd it so critical to control for case mix in studying health care cost functions? What are the analytical dangers if they do not?
How do legal restrictions on practice for nurses and physicians tend to affect the observed elasticities of substitution? Would the elasticities be higher if legal restrictions were removed? Would
Given the cost function and economies of scale and scope information reviewed in this chapter, does a policy encouraging large, centralized hospitals seem wise? Will market forces tend to reward
Speculate on what types of services are more appropriate to large, regional hospitals, and what types of services are more appropriate to small, local hospitals.
Economists defi ne the elasticity of substitution as the percentage change in the capital/labor ratio elicited by a 1 percent change in the factor price (wages/capital costs, for example) ratio.
Contrast technical and allocative effi ciency. How can technical and allocative ineffi ciency in health care fi rms affect patient welfare?
What does “stochastic” mean in stochastic frontier effi ciency estimation? Give several real-life examples of events that could shift the production frontier.
Which of the following types of technological change in health care are likely to be cost increasing: (a) threats of malpractice suits that cause physicians to order more diagnostic tests on average
As technologies diffuse, why do some fi rms adopt them before others? What types of technologies would you expect to be adopted most quickly? Most slowly? What factors can slow the rate of diffusion
Draw an isoquant that shows relatively little substitution between two factor inputs and one that shows relatively large substitution. Let the vertical axis represent capital and let the horizontal
Draw isocost curves that are tangent to your isoquants and that each have the same slope. Mark the points of tangency and note the capital/labor ratio. Draw new, fl atter isocost curves that are
Determine the elasticity of substitution in the case of the isoquant in panel A of Figure 6.1. Physician hours Physician hours P 0 N Q=1 Nurse hours PR Q' = 1 Nurse NS hours A. No Substitution B.
Suppose a fi rm has the production technology shown below for Goods 1 and 2.(a) Does Good 1 indicate economies of scale? Why?(b) Does Good 2 indicate economies of scale? Why?(c) Do the two goods
If any fi rm’s price of labor and capital each double, what will happen to the expansion path (i.e., locus of tangencies between the isoquants and isocost curves)? What will happen to the fi rm’s
Figure 6.5, panel A, illustrates technical inefficiency for firms with a one-input production function. It was explained that ineffi ciency could be measured by output distance or, alternatively,
In Escarce’s account of diffusion, do improved “channels of information” matter regardless of the information content? Does all information increase the adoption rate? If not, what information
Calculate the average costs at points C , F , and G in Figure 6.2. Do they imply increasing or decreasing returns to scale? Why? H K Capital 50 849 A 40 25 G Expansion path Q=200 Q=150 Q=100 0 20 30
Why do we treat leisure and earnings as ordinary utility-increasing goods?
Describe the aspects of health that make it a consumption good. Describe those that make it an investment good.
Give examples of how health is produced from time and market goods.
Why is the depreciation of a capital good a cost to society? In what ways does a person’s health depreciate?
Why might older people’s health care expenditures increase in the Grossman model even though their desired health stock may be lower?
List at least three factors that might increase an individual’s marginal effi ciency of investment in health capital.
Suppose that a young woman goes on to medical school and becomes a physician. Would you expect her expenditures on medical goods for her own health to be higher or lower than a nonphysician? Why?
From your experience, do you think the typical person becomes less healthy upon, or shortly after, retirement? What does the Grossman model predict?
People who earn a higher salary can afford more goods, including health care. However, according to Grossman, they will choose a higher desired health stock. Why is this so, according to the model?
Knowing the potential negative effects, would a “rational” person ever choose to become obese.
Draw an isoquant for medical inputs and other inputs in the production of a given amount of health investment. What does the isoquant mean? How would the isoquant look if substitution was limited? If
Suppose that no amount of other goods can compensate for a loss in health. How would the individual’s indifference curves look? Is this a reasonable assumption in terms of what we actually see
Suppose that John Smith gets promoted to a job that causes two changes to occur simultaneously:John earns a higher wage, and a safer environment causes his health to depreciate less rapidly. How
Suppose that John could work 365 days per year and could earn $200 per day for each day he worked. Draw his budget line with respect to his labor–leisure choice.
Suppose that John chooses to work 200 days per year. Draw the appropriate indifference curve, and note his equilibrium wage income and labor–leisure choices.
Suppose, in Exercise 5, that John’s wage rises from $200 to $210 per day. Show how his equilibrium level of income and labor–leisure will change.Exercise 5Suppose that John chooses to work 200
Suppose that John is ill 10 days per year. Draw the impact of this illness on the equilibrium defi ned in Exercise 5. How will it change his equilibrium allocation of earnings and labor vs.
Answer the following.(a) Depict Sara’s optimal stock of health capital at age 18, with a high school diploma and a wage of $10 per hour.(b) Suppose that she invests in a college education,
Consider Fred’s investment in units of health capital with the following function:I = 500 − 1,000 × cost of capital.(a) Indicate some of the components of the cost of capital, and why they are
Consider the obesity model where equation (7.7) refers to a daily obesity function. Suppose that Ed can either exercise 0 or 1 session per day, with μ = 300. If Ed substitutes one junk food meal (δ
Discuss the difference between cardinal and ordinal utility. Why is cardinal utility necessary for the analysis of risk and insurance?
What does the term moral hazard mean? Give examples.
The deductible feature of an insurance policy can affect the impact of moral hazard.Explain this in the context either of probability of treatment and/or amount of treatment demanded.
Describe the benefi ts to society from purchasing insurance. Describe the costs. Defi ne and discuss the welfare gains from changes in insurance coverage.
If only risk-averse people will buy health insurance, why do many people who buy health insurance also buy lottery tickets (an activity more consistent with risk-taking, especially since most
The game show Deal or No Deal , popular throughout the world, provides many elements of risk and expected value. Discuss the ways that the decision as to whether to “take the money” or to
Some brokers (called viatical brokers) offer cash settlements in advance to people with terminal diseases who have life insurance, paying them in advance of their death. Is this practice ethical? Is
Because health insurance tends inevitably to cause moral hazard, will the population necessarily be overinsured (in the sense that a reduction in insurance would improve welfare)?Are there benefi
From Nyman’s arguments, do all increased expenditures become welfare enhancing?Give examples of some that enhance welfare. Give examples of others that do not.
Suppose that Nathan’s employer provides a health insurance policy that pays 80 percent of $1 over the fi rst $100 spent. If Nathan incurs $1,000 in expenses, how much will he pay out-of-pocket?
Suppose that rather than fl ipping a coin, one rolls a die. If the value is 1, 2, 3, or 4, the player wins $1. If it is 5 or 6, the player loses $1. Calculate the expected return.
(a) Draw a utility of wealth curve similar to Figure 8.1 for consumers who are not riskaverse.How would its shape differ from Figure 8.1?(b) Draw a utility of wealth curve similar to Figure 8.1 for
(a) Show the gains from insurance, if any, in Exercise 4a.(b) (Difficult) Show the cost of insurance in Exercise 4b.Exercise 4a,b(a) Draw a utility of wealth curve similar to Figure 8.1 for consumers
We have discussed the role of utility functions in the purchase of insurance.(a) Suppose Edward’s utility function can be written as:What is his marginal utility if income is $1,000 per month?
Suppose, if ill, that Fred’s demand for health services is summarized by the demand curve Q = 50 – 2 P , where P is the price of services. How many services does he buy at a price of$20? Suppose
In Exercise 7, if the insurance company pays Fred’s entire loss, what will Fred’s expenses be? How much will the company pay? Will it continue to offer him insurance at the actuarially fair rate?
Suppose that the market demand for medical care is summarized by the demand function:and the market supply is summarized by the supply function:(a) Calculate the equilibrium quantity and price,
Suppose that the market demand for medical care is summarized by the demand function:and the market supply is summarized by the supply function:(a) Calculate the equilibrium quantity and price,
Suppose, in Exercise 9, that the coinsurance rate was raised to 50 percent.(a) Calculate the new equilibrium price and quantity. (Hint: How does the demand curve shift?)(b) Calculate the deadweight
Consider the discussion in the text about Elizabeth’s breast cancer treatment. Using Figure 8.11, calculate the net welfare benefi ts if m u = 20,000, m c = 40,000, and m i = 44,000. To aid in the
Discuss how time costs affect health care demand, and speculate on this and possible other reasons for the lower observed per capita demand for health care in the western United States.
Defi ne price elasticity of demand . How does an increase in the coinsurance rate affect the consumer’s price elasticity?
Why are fi rm-specifi c demand price elasticities higher than elasticities for demand in general? Why does a high elasticity indicate a very competitive market?
For the following pairs of services, which of the two services would you expect to be more income elastic? More price elastic?(a) Surgical services versus allergist services.(b) Heart surgery versus
It has been discovered that countries with higher per capita incomes spend more than proportionally as much on health care. What does this imply about the cross-national income elasticities? Why
The frequencies of health care visits are often used to measure service demand. Many, however, criticize the use of this variable. What are some pros and cons of the use of visits?
We often speak of how price rations goods. What are other rationing measures in clinics in which free care is provided?
Explain or show why the impact of changes in coinsurance rates on demand depends on the elasticity of demand. What sorts of health care goods or services will be responsive to changes in coinsurance
A profi t-maximizing fi rm, fi nding that its demand is inelastic, will necessarily fi nd it profi table to increase its price; therefore, its equilibrium price elasticity will necessarily be greater
The consumer’s indifference curves in Figure 9.2 indicate substitutability between visits and other goods. What will the indifference curves look like if the consumer perceives no substitutability?
Some argue that wide disparities in utilization rates across racial and ethnic groups are indicative of discrimination (see Box 9.3). Use indifference curve analysis to explain why it may be diffi
Box 9.4 describes the diffi culty that consumers may have in searching for the total “bundled”price for their hospital care. What are some of the implications of this lack of pricing transparency
Suppose that Martha’s income is $40,000 per year. She can spend it on health care visits, which cost $80 per visit, or on groceries (standing for all other goods), which cost $100 per bag of
Suppose that Martha’s income rises to $42,000 per year, and that she increases her consumption of health care visits by fi ve visits. Using the graphs for Exercise 1, draw the new equilibrium. What
Consider the following information on Alfred’s demand for visits per year to his health clinic, if his health insurance does not cover (100 percent coinsurance) clinic visits.(a) Alfred has been
Suppose that a consumer makes V 0 physician visits each year at a price of P 0 . If the price elasticity is −0.4, what will happen to the number of visits if the price increases by 10 percent? What
If the price elasticity of demand is −0.5 and the income elasticity is +0.3, then what will be the effect of a simultaneous 10 percent increase in price and a 10 percent increase in income on
Draw a diagram for hospital care that refl ects the income-elasticity estimates found empirically. As income increases, what happens to the proportion of income spent on hospital care?
Would the opportunity cost of waiting time be higher for higher-income people or lowerincome people? Given your answer, for which income group would money price tend to be a smaller portion of the
Explain how the demand for health insurance is related to the demand for health care.Would the demand for health care then depend also on whether the person paid for the insurance or alternatively
The market for higher education is another example where a high degree of information asymmetry is likely. What mechanisms have evolved to help students in their choice of schools and classes within
The situation in which an individual is interviewing for a job also exhibits information asymmetry. Explain why. How does the relatively poorly informed party deal with this?
The use of professional and independent buyer-agents to help individuals purchase automobiles or houses is becoming a more common phenomenon. Given the confl ict of interest facing the
The used-car market has publications that provide information on the quality and prices of used cars. Are similar avenues of information available to health consumers?What kind of information do they
What is a reputation good? What are examples of reputation goods outside the health care sector? Show what Pauly and Satterthwaite predict will happen to the demand curve for health services as a
Stigler argued that the variation in fees increases as buyer information decreases. Suppose you observe that each seller in a market is charging the identical price. What potentially confl icting
Why don’t physicians guarantee their work as do many auto repair shops?
Various commentators have suggested that only 15 to 20 percent of all health care services have been subject to rigorous, controlled investigation, that is, care based on what is commonly called
Is it possible to have a situation where higher costs, as measured by the resources used to provide care, do not produce higher quality?
According to clinical research, nearly one-half of the care provided in the United States falls short of recommended treatment protocols. Discuss how imperfect and asymmetric information contribute

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