1. Consider the following information on Betty’s demand for visits per year to her health
clinic, which is based upon the fact that her insurance does not cover clinical visits (that is, based upon a 100% coinsurance rate):
a. Betty has been paying $30 per visit (V). How many visits does she "consume" per year? Draw her demand curve.
b. Suppose now that her insurance company institutes a 70% coinsurance feature (that is, Betty pays 70% of the price of each visit). Show what happens to the demand curve. What is Betty’s new equilibrium quantity?
c. Appraise this statement: Compared with a 70% coinsurance rate as in part (b), Betty’s price elasticity of demand would be even higher if the coinsurance rate was 60%. (No calculations are needed to answer this question, so don’t calculate elasticity!)
2. Appraise this statement: A price ceiling on physician fees that is below the equilibrium market price would result in a reduction in social welfare. HINT: Include the concepts of consumer surplus, producer surplus and deadweight loss in your answer.
3. A foundation is considering funding a health intervention project that has been proposed by a local hospital. The foundation will base its decision about whether or not to fund the project strictly by considering the project’s financial benefits and costs. The project costs are $5 million at project inception (Year 0) plus $1 million per year in Year 1, 2, 3, 4 and 5. The present value of project benefits is estimated to be $8.5 million. At a 10% discount rate, should the foundation fund this project, or reject it? ["Year 0 means today (the project’s inception), "Year 1" means one year from today "Year 2" means 2 years from today, and so on.] VERY IMPORTANT: SHOW ALL WORK (that is, the calculations and formulas that you use to obtain your answer. Do NOT simply give your final answer. Even if your ultimate answer turns out to be incorrect, by showing all of your work, then you can be given partial – or even nearly full credit – for your answer. On the other hand, even if you provide a correct answer but do not show your work, then you will receive a poor grade. The answer to Question 3 may be written by hand (NEATLY!), and need not be typed.
4. Suppose that Norton’s income is $70,000 per year. He can spend it on healthcare visit
(V) or on all other goods (OG). The price per V is $200, and the price per OG is $50. a. Draw Norton’s budget constraint (put V on the horizontal and OG on the vertical axis). Using indifference curves, show Norton’s optimum if he buys 1360 OG per year.
b. Suppose that Norton’s falls to $50,000 per year, and that in response he decreases his consumption of V by 2. Show the new equilibrium point on the graph. What is his income elasticity of demand for V?