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ANS+to+EXAM+2+-+Health+Econ,+Spring+2010

# ANS+to+EXAM+2+-+Health+Econ,+Spring+2010 - in consumer’s...

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Department of Economics Prof. Derek DeLia Health Economics 220:316:01 Spring 2010 ANSWERS TO EXAM 2 PART I Question Answer 1 d 2 e 3 b 4 a 5 d 6 c 7 b 8 e 9 a 10 e 11 c 12 a 13 d 14 c 15 b PART II a. Q=22.8, P=14.4 b. Q=22.8. The consumer would have to spend an extra \$171.68 to gain an additional \$51.48 in consumer’s surplus. This is clearly not worth it, so the consumer uses the same amount of healthcare as in part a. c. The equilibrium is allocatively efficient, since the only units consumed are those where value is greater than or equal to marginal cost. d. this is similar to part b except now the consumer would have to spend \$671.68 to gain \$51.48
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Unformatted text preview: in consumer’s surplus. Again, not worth it. e. This answer is the same as part c. PART III a. U’’(W) = -1/W 2 < 0 for all W>0. Therefore, the consumer is risk averse. b. The objective function is F(a) = 0.2*ln[500,000 – 10,300a – (1-a)50,000] + 0.8*ln[500,000 – 10,300a] Since U(W) is concave (i.e., risk averse consumer), setting the first derivative of F(a) to zero gives maximum utility. This happens when a = 0.64....
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