LECTURE+2+-+HC+production+_+value

LECTURE+2+-+HC+production+_+value - Lecture 2: Health...

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Lecture 2: Health Economics 01:220:316 Prof. Derek DeLia, Ph.D.
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Health production function H = F(X 1 , X 2 , X 3 , …, X k ) 1.What are some possible outputs? 1.What are some possible inputs? 1.Why is this useful?
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“Typical” production function INPUT OUTPUT
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Increasing health inputs at the margin Extensive margin Intensive margin Iatrogenesis How can this happen? Diminishing returns?
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Is the production worth it? Review of price theory Seller’s reservation price ==> minimum willing to accept (WTA) Buyers reservation price ==> maximum willing (and able) to pay (WTP) WTP>WTA ==> mutually beneficial trade Example WTP = 10, WTA = 5, trading price = 8 What is the consumer’s surplus? What is the seller’s surplus? What is the total surplus? What determines the trading price?
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Assumptions 1. Homogeneous goods 2. Perfect information 3. No barriers to entry or exit 4. No externalities Consequences 1. Price taking behavior 2. Long run equilibrium: Allocative efficiency: P=MC Technical efficiency: P = min(ATC) No economic profits
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Pure monopoly (single seller) Can set the selling price Profit max ==> MR MC Pure monopsony (single buyer) Can set the buying price (e.g., wage in labor market) Profit max ==> VMP MLC VMP = value of marginal product = (marginal product) x (price) MLC = marginal labor cost
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Example 1 : Demand for dental visits Marginal cost per visit (Q) is constant at $30 Quantity Price ($) 0 100 1 90 2 80 3 70 4 60 5 50 6 40 7 30 8 20 9 10 10 0 1. Find equilibrium P & Q if the dentist is a monopolist. 1. Assuming fixed costs = 0, what is the equilibrium level of profit? 1. Is the equilibrium allocatively efficient? If not, what is the deadweight loss? 1. How would the answers change if the market for dental visits were perfectly competitive?
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Try it again! Now marginal cost per visit (Q) is constant at $85 Quantity Price ($) 0 200 1 190 2 185 3 170 4 163 5 150 6 141 7 130 8 122 9 75 10 0 1. Find equilibrium P & Q if the dentist is a monopolist. 1. Assuming fixed costs = 100,
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This note was uploaded on 01/13/2011 for the course ECONOMICS 01:220:316 taught by Professor Delia during the Fall '10 term at Rutgers.

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LECTURE+2+-+HC+production+_+value - Lecture 2: Health...

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