ECONOMICS 375

ECONOMICS 375
Problem Set #1
Answer NEATLY on a separate paper. Typing is bonus!
1.
a. Illustrate with a production possibilities curve a state government’s choice
between additional funding for nursing homes and for community health centers.
b. Explain why you drew the production possibilities curve the way you did.
c. Explain the difference in opportunity costs between expanding community health
centers when society is operating efficiently vs. when some inefficiency exists in
the system. Illustrate your answer on the production possibilities curve.
d. What would happen to the production possibilities curve if the federal government
made available more resources for community health centers, with the only
proviso being that the state may not spend less on community health than it does
already. Illustrate in your graph.
2. Using the three legged stool of health economics, identify one problem with the US
health care system for each of the three ‘legs.’ How would you address each of these in a
perfect world?
3. Explain and show in a graph the relationship between health and utility. Explain both the
consumption and investment theories of why individuals get utility from health. How
does the law of diminishing marginal utility fit into the relationship?
4. Using a production function for health as a function of medical care to differentiate
between the effect of increased income on health in a wealthy country such as the U.S. vs.
in a relatively poor country such as Somalia. How would a change in environmental
quality affect the production function in either country (same effect)?
5. What relationship exists between education and health? Explain how education can
affect health, how health can affect education, and how a third characteristic can affect
both.
6. Distinguish between the human capital and willingness-to-pay approaches for
determining the value of a life. Why would you expect the willingness-to-pay approach to
generally estimate the value of a life to be higher than the human capital approach?
7. Should a program which is estimated to cost approximately $10,000 per QALY be
implemented? Why?
8. A particular treatment plan will cost a patient an initial outlay of $10,000 (year 0), $5,000
in the first year after that (year 1), and $1,000 per year for the next three years. Use a
discount rate of 5% (r = 0.05) to determine how high the benefit of this plan must be for it
to be cost effective.
9. Why isn’t the market for health care services organized according to a typical consumer
(patient) and producer (health provider) relationship?
10. Which of the following reimbursement and consumer copayment schemes have the
greatest and lowest likelihood of producing high-cost, low-benefit medicine? Explain
your answers.
a. Fee-for-service plan with 40 percent consumer copayment.
b. Prepaid health plan with 40 percent consumer copayment.
c. Fee-for-service plan with no consumer-cost sharing.
d. Fixed-salary plan with no consumer-cost sharing.
e. Prepaid health plan with no consumer-cost sharing.
f. Fixed-salary plan with 40 percent consumer-cost sharing.

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