Week4_First Test Answers - NAME:_ANSWER KEY_ Health...

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NAME:____ANSWER KEY____________________________ Health Economics First Test, Georgia State University, Rashad Thursday, January 29 th , 2009, 4:30 – 6:00pm Please put all answers on the question sheet. You have one and a half hours to finish the test. You may use your textbook, notes, and handouts in answering. Please use full sentences when answering. Best of luck. 1. (2 points) What is the definition of health economics, as defined in class? Health economics studies the supply and demand of health care resources and the impact of health care resources on a population. 2. (6 points) Use production theory to graphically illustrate the case in which a medical innovation improves health without any change in the consumption of medical care. The total product curve shifts upward and a completely vertical movement takes place from the original total product curve to the new product curve. The implication is that more output of health can now be obtained from the same level of medical services. The movement from point A to point C illustrates the situation where the new technology does not improve health, but lowers the consumption of medical care: 3. (6 points) Use health production theory to explain what would happen to the relationship between good health and medical care there were a technological advancement in medical care. Provide a graph to illustrate your explanation. More health can be achieved for a given amount of medical care. The total product curve shifts and rotates upward: 1
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2 4. (4 points) Explain why pooling risk using a large number of people is desirable for insurance companies. Having a large number of people allows for risk to be spread out, and the law of large numbers implies that whereas single events may be random and largely unpredictable, the average outcome of many similar events across a large population can be predicted fairly accurately. Third-party payers such as insurance companies find this desirable as they can judge from past experiences involving a large number of individuals. 5. (4 points) Explain how health is both a consumption good and an investment good. Health is a durable good that is desired for consumption and investment purposes and people demand health because it generates utility or satisfaction. From a consumption perspective, an individual desires to remain healthy because he or she receives utility from an overall improvement in the quality of life. The investment element is concerned with the relation between health and time. A healthy person allocates less time to sickness and therefore has more healthy days available in the future to work and to enhance income or to pursue other activities. The law of diminishing marginal utility states that each successive incremental improvement of health generates smaller and smaller additions to total utility. Thus, utility
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This note was uploaded on 02/20/2010 for the course ECON 4210 taught by Professor Rashad during the Spring '10 term at Georgia State University, Atlanta.

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Week4_First Test Answers - NAME:_ANSWER KEY_ Health...

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