Please show the derivation process and limit your answers within
5 pages. Highlight the answer for each question in MS Word
format.where E represents annual health care
expenditures per capita and Y stands for income per

Q1: Problem 2
Suppose a health expenditure function is specified in
the following manner:

E = 500 +

where E represents annual health care
expenditures per capita and Y stands for income per

A. Using the slope of the health expenditure function,
predict the change in per capita health care expenditures that
would result from a $1,000 increase in per capita

B. Compute the level of per capita health care spending
when per capita income takes on the following dollar values: 0;
1,000; 2,000; 4,000; and 6,000.

C. Using the resulting values for per capita health care
spending in part B, graph the associated health care expenditure

D. Assume the fixed amount of health care spending
decreases to $250. Graph the new and original health functions on
the same graph. What is the relation between the original and new
health care expenditure functions?

E. Now assume that the fixed amount of health care
spending remains at $500 but the slope parameter on income
decreases to 0.1. Graph both the original and new health care
expenditure functions. Explain the relation the two

Q2: Problem 3
Victor Fuchs (1996) lists the following questions in an
article in The Wall Street Journal. Identify whether the
following questions involve positive or normative analysis. All the
questions deal with a Republican plan to reform Medicare, the
public health insurance program for the elderly.

A. How many Medicare beneficiaries will switch to managed

B. How much should the younger generation be taxed to pay
for the elderly?

C. Should seniors who use less care benefit financially,
or should they subsidize those who use more care?

D. How many Medicare beneficiaries will switch to
medical saving accounts?

E. What effect will these changes have on
F. How much should society devote to medical
interventions that would add one year of life expectancy for men
and women who have already passed the biblical “three score and

G. Will senior citizens’ choices about types of coverage
depend on their health status?

H. If the rate of spending growth is reduced to 6
percent from 10 percent a year, what will happen to the growth of
medical services?

Q3: Problem 9
Explain how a change in each of the following factors
would alter the shape of the total product curve for medical
A. An increase in education.
B. An improvement in lifestyle.

C. An improvement in the environment.

Q4: Problem 10
Some people believe cigarette and alcohol advertisements
should be banned completely in the United States. If this were the
case, what would likely happen to the shapes of the total and
marginal product for medical care?

Q5: Problem 9
According to Chase (1993), TPA, a heart drug
produced by Genentech Inc., costs ten times more at $2,200 a dose
than streptokinase, an alternative heart drug sold by Astra AB and
Kabi Farmacia AB of Sweden and by Hoechst AG of Germany. A trial of
41,000 heart attack patients found that the TPA treatment saves 1
more life out of 100 than streptokinase does. Assume that a person
pays full cost for either drug and chooses TPA over streptokinase.
Another otherwise identical person makes the opposite choice. Use
the willingness-to-pay approach to calculate the difference in the
value of their lives (assume that dosage requirements are the

Q6: Problem 12
Given this information, answer the following

4 life-years gained
10 life-years gained

A. Calculate the ICER for the new treatment, assuming
that the new treatment would replace the old one.

B. In what quadrant is the ICER located in Figure 3-4?
Is cost effectiveness analysis relevant?

C. How does the answer change if the cost of the new
treatment equals $75,000?

Q7: Problem 3
Describe the demand curve shift (rightward or leftward)
about how the following changes would affect the demand for
inpatient services at a hospital in a large city.

A. Average real income in the community

B. In an attempt to cut costs, the largest employer in
the area increases the coinsurance rate for employee health
coverage from 10 percent to 20 percent.

C. The hospital relocates from the center of the city,
where a majority of the people live, to a suburb.

D. A number of physicians in the area join together and
open up a discount-price walk-in clinic; the cross-price elasticity
of demand between physician services and inpatient hospital
services is –0.50.

Q8: Problem 7
In reaction to higher input costs, a physician decides
to increase the average price of a visit by 5 percent. Will total
revenues increase or decrease as a result of this action? Use the
concept of price elasticity to substantiate your

Q9: Problem 10
You are employed as an economic consultant to the
regional planning office of a large metropolitan area, and your
task is to estimate the demand for hospital services in the area.
Your estimates indicate that the own-price elasticity of demand
equals –0.25, the income elasticity of demand equals 0.45, the
cross-price elasticity demand for hospital services with respect to
the price of nursing home services equals –0.1, and the elasticity
of travel time equals –0.37. Use this information to project the
impact of the following changes on the demand for hospital

A. Average travel time to the hospital diminishes by 5
percent due to overall improvement in the public transportation

B. The price of nursing home care decreases by 10

C. Average real income decrease by 10

D. The hospital is forced to increase its price for
service by 2 percent.