Page 1 of 7 – Answers

Economics 7550

Dr. Goodman

Final Exam

Fall 2010

This exam has seven (7) questions. Each is worth 20 points. Allocate your time appropriately. Any student caught cheating will be given a grade of zero on the exam. I want explanations for all answers, rather than simple numerical results.

  1. Consider the demand for health care summarized by the demand curve:

Q = a – bP

where Q = the quantity demanded; P = out-of-pocket price per visit.

  1. (5 points) Assuming that there is no insurance, calculate the equilibrium quantity demanded and the consumer surplus for P = 50.
  1. (5 points) Suppose, instead that the consumer has a health insurance policy requiring that she pay 10% of the $50 price out of pocket. Calculate the new quantity demanded, and the new level of consumer surplus to the consumer.
  1. (5 points) Calculate the increased expenditures on health care, and the amounts borne by the consumer and by her insurer under the insurance in part (b).
  1. (5 points) Calculate the “deadweight loss” to society brought on by moral hazard from the insurance.


2. Consider the evaluation of a public health initiative in which the costs will occur in the first five years, but the benefits will occur for the next 30 years. We are given the following information for the costs and benefits of a project of size Q.

Total Costs= TC =5 + 10Q + Q2.

Total Benefits= TB = 40Q - Q2.

  1. (5 points) Assuming that an economically efficient solution exists, graph TC and TB as functions of Q. Calculate the economically efficient solution and explain why it is efficient.
  1. (5 points) What is the (Total Benefit/Total Cost) ratio at the economically efficient solution? Is this project acceptable by Benefit/Cost criteria?
  1. (5 points) Over what quantity range will the (Total Benefit/Total Cost) ratio be greater than or equal to 1. Is it the same as the solution to part a? Why or why not?
  1. (5 points) There is some criticism that the discount rate for evaluating the project (say, 0.03) has been set too low. If it is raised, (say, to 0.05, what will happen to your answers for parts a through c. Be as specific as you can, given the information that you have.


3. Here is a yardstick problem. A monopoly hospital faces the following demand curve

q = 400 – 10p

and the following marginal cost (with no fixed costs)

c = 22

  1. (8 points) Calculate the profit maximizing values of p* and q*, the maximized profit* and the consumer surplus CS*.

Suppose that the firm could reduce its costs according to the formula

R = 40d2, where d = the original cost (here, 22) – the new (reduced) cost.

A yardstick regulator assigns the hospital the following parameters:

Lump sum subsidy = 300;

Yardstick price =20;

  1. (4 points) Give the profit maximizing condition for the yardstick regulation.
  2. (8 points) Calculate the profit maximizing values of p* and q*, the maximized profit* and the consumer surplus CS*


4. There is considerable literature on non-profit entities in the provision of health services. Here are some questions about them.

  1. (5 points) Review at least two theories as to why we have non-profit provision of health services.
  1. (5 points) Derive briefly the “quality-quantity” trade-off for non-profits.
  1. (5 points) Suppose we have a non-profit clinic that cares only about the quality of treatment for its clients. Will it serve fewer or more patients than one that cares only about quantity? Justify your answer.
  1. (5 points) Lakdawalla and Philipson discuss a theory of non-profits in which the for-profit firms are the “marginal firms.” Sketch out the theory briefly and explain why this prediction arrives.


5. Here are a few questions about the U.S. Medicare and Medicaid programs.

  1. (5 points) Briefly, provide the distinctions between Medicare and Medicaid.
  1. (5 points) Diagram the Medicaid “matching” formula and show how it changes the amounts that states spend on covered services.
  1. (5 points) In Medicaid, what keeps the states from simply substituting federal monies for their own?
  1. (5 points) In the current times of U.S. federal budgetary problems, what might be the impact of federal requirements that states pay bigger shares of their Medicaid expenditures?

a. Medicare = old; Medicaid = poor.

b. Subsidizes the states.

c. Federal government stipulates a

minimum amount that states can spend.

d. States could cut back their matches, or drop out of Medicaid entirely.

  1. Dr. Goodman performed a regression analysis for share of GDP going to health expenditures for the years 2006, 2007, and 2008, with the various countries having from 1 to 3 observations each. He found the following:

SUMMARY OUTPUT / Dep Var: Log of Share of GDP
to Health Expenditure
Regression Statistics
Multiple R / 0.708485
R Square / 0.501951
Adjusted R Square / 0.485163
Standard Error / 0.159207
Observations / 93
ANOVA
df / SS / MS / F
Regression / 3 / 2.273545 / 0.757848 / 29.8990818
Residual / 89 / 2.255872 / 0.025347
Total / 92 / 4.529417
Coefficients / Standard Error / t Stat
Intercept / -2.2409 / 0.4649 / -4.82
LGDP / 0.4261 / 0.0453 / 9.40
Y07 / -0.0174 / 0.0393 / -0.44
Y08 / 0.0057 / 0.0412 / 0.14

where the dependent variable is the log of the SHARE of expenditures.

The explanatory variables are:

LGDP = log GDP per capita

Y07 = 1 if the Year is 2007; 0 otherwise

Y08 = 1 if the Year is 2008; 0 otherwise

If Y07=Y08=0, the Year is 2006.

  1. (5 points) Explain the fit of the overall regression and LGDP.
  2. (5 points) Explain the impacts of the Year Dummy variables.
  3. (5 points) Does the share increase or decrease as income rises? Explain.
  4. (5 points) Is health care a luxury or a necessity according to this regression? Explain.


7. For your paper, you wrote a brilliant work in health economics.

  1. (4 points) State the null hypothesis of your term paper
  2. (4 points) State the alternative hypothesis of your term paper.
  3. (4 points) What evidence either supported or refuted your null hypothesis.
  4. (4 points) What was the major analytical problem that you faced in writing your paper?
  5. (4 points) If you had another month to work on the paper, how would you improve it (the answer that “the paper could not be improved” will earn 0 points).