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Unformatted text preview: PADP 8670 Fertig Fall 2011 UGA Homework 3 Solutions 1. Show "crowd-out" graphically. Specifically, show that some people have an incentive to switch from private health insurance to public insurance when it becomes available. Put health insurance on the x-axis and all other goods on the y- axis. Explain in words what your graph is showing. $ Medicaid' Private' Insurance' Indifference' curve'with' Medicaid' Indifference' curve'in'the' absence'of' Medicaid' Health Insurance Crowd-out occurs when people who choose to be privately insured when there is no public insurance option available to them (point labeled "Private Insurance") switch to the public insurance program when it is enacted or expanded (point labeled "Medicaid"). The public insurance is intended to help the uninsured, not to pull people out the private insurance market. 2. Kristin is a manager at Kroger for a wage of $20 per hour. She has 14 hours a day available for work and other non-sleep activities. Right now, she works 9 hours a day. Draw a labor-leisure diagram for Kristin including the values of her budget constraint's x and y-intercepts. Draw an indifference curve tangent at the appropriate point and label it. Graphically show the effect on Kristin's labor supply (number of hours of work) if Kroger gives Kristin a $2 raise in her hourly wage. Explain the result. Make sure to mention the income and substitution effects in your answer. Before the raise: $ $280 $180# (5#hrs#leisure,#$180)# Slope=5$20# 5# 14 Leisure After the raise: As this graph is drawn, Kristin reduced her work hours (increased her leisure) slightly. The income effect of a raise is to cause her to feel richer and thus want to consume more leisure. The substitution effect of a raise is to make her consume less leisure, as it has now gotten more expensive. The income effect dominated the substitution effect in this case. If I would have drawn the tangent on the higher budget line more to the $ left, Kristin's substitution effect would have dominated $308 resulting in more work $280 and less leisure. $180" Slope=-$22" Slope=-$20" 5" 14 Leisure $ $3200 3. Assume that a particular Canadian province has a welfare program that pays monthly benefits of $1000 to single parents with one child; this benefit is reduced by one dollar for each dollar of earnings. Assume now that this province is considering a policy proposal to adopt a new program that pays to "qualified" recipients a monthly benefit B= 0.5 * ($3200 monthly earnings). For example, a person working 150 hours a month at $8 per hour has earnings of $1200, and in addition this person would receive welfare benefits of B=0.5*($3200-1200)=$1000, for a total income of $2200. To qualify for this proposed program, a person must work 125 hours per month. Draw the budget constraint associated with both the current and the proposed welfare programs for a person who earns $8 per hour. Assume that the maximum number of hours a person can work in a month is
400. Then analyze the work incentives of the proposed program compared to those of the current welfare program. Include a labor-leisure diagram showing the budget constraints under the two programs. Make sure to discuss whether the incentives will vary by one's indifference curve. Current Program: $ $3200 Proposed Program: $1500%
$1000$ 275 400 Leisure 275 400 Leisure For people with a strong preference for leisure, the proposed program will likely increase the number of hours worked compared to the current program (top diagram below). However, for people who prefer to work a lot, the income effect of the proposed program may cause them to work fewer hours (bottom diagram below). An individual who will increase their work hours under the proposed program. $ $3200 400 Leisure An individual who will decrease their work hours under the proposed program. $ $3200 400 Leisure 4. Read Free Clinic paper and write a one page summary. Study estimates whether the financial benefits of reducing the use and costs of hospital care outweigh the costs of investing in primary care through a free clinic. Study takes the hospital's business perspective does not include societal benefit of healthier workforce or the societal cost of volunteer time by doctors. Benefits of free clinic to hospital: non-urgent ED costs and inpatient costs pre- enrollment non-urgent ED costs and inpatient costs post-enrollment = $35,146 or $170 per patient Costs of free clinic: 207 clinic patients * average number of clinic visits * average cost per visit =$66,635 or $322 per patient Additional hospital costs of having the free clinic: other hospital costs post- enrollment other hospital costs pre-enrollment = $37,957 or $183 per patient Conclusion: Benefit=$170/patient; Cost=$505/patient. Assume cost is high because 1st year of enrollment but benefits will be sustained over time. Savings must be sustained for at least 3 years to offset high initial costs. ...
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