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# faf07ans - Econ 132 Fall 2007 Version A 1(a(b See over...

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Econ 132 Fall 2007 FINAL EXAM (A): SOLUTIONS Cameron Version A 1(a)-(b) See over. (c) The Rand study considered just the welfare loss due to moral hazard. Using a randomized experiment it was able to measure price responsiveness. This was large enough that the welfare loss due to moral hazard was very large. 2.(a) Arc elasticity = [(7000-5000)/6000] / [(0-100)/50] = [2/6] / [-2] = -1/6 = -0.17. (b) t = [0.90-0.85]/sqrt(0.02 2 +0.02 2 ) = 0.05/sqrt(0.0008) = 0.05/0.0283 = 1.77 < 1.96. Do not reject H 0 : no difference. Conclude that the difference is not statistically significant at 5%. (c) Cost per QALY = 254/0.124 = \$2,048. This is very low. The intervention is cost-effective. 3.(a)-(c) See over. 4.(a) Produce where Social MB = Social MC ==> 1,000,000 – 10Q = 100 ==> Q = 99,990 cows tested. (b) Social MC = Private MC + cost to others = 3 + 1 = 4. Produce where MB = Social MC ==> 10 – 0.1Q = 4 ==> 0.1Q = 6 ==> Q = 60 million packets. (c) Medicare is a solely federal program funded from OASDHI payroll taxes. Medicaid is joint federal / state funded from general tax revenues. 5.(a) A year of life was viewed as costing \$100,000. The undiscounted benefit is \$1,200,000.

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