EON 353 - Health Economics
1. (a) Using a supply-and-demand graph and assuming competitive markets, show and
explain the effect on equilibrium price and quantity of the following:
i. A technological change that reduces the cost of producing X-rays on the market for
physician clinic services.
ii. Increased graduation of new doctors on the market for physician services.
iii. Increased awareness of healthy diet in the population on the market for hospital services.
iv. A price ceiling on the market for pharmaceutical drugs.
(b) Suppose that patient makes Q0 physician visits each year at a price of P0. If the price
elasticity’s is -0.3, what will happen to the number of visits, if the price rises by 10
percent? What will happen to physician expenditures? Why?
2. (a) Suppose you are recently hired as an economic analyst advising the Saskatchewan
Minister of Health with respect to the health care initiatives. The head of the medical staff
of the largest hospital in the province is lobbying for the new initiative to expand kidney
dialysis and transplantation facilities, and he shows you several clinical research studies,
which demonstrate the cost-effectiveness of a new transplantation technique compared to
the old technique and to dialysis. By giving proof of cost-effectiveness, he is claiming
that his initiative should be funded without further delay. Being an economic analyst,
how would you reply?
(b) It is very common to hear economists talk about the "equity-efficiency" trade-off.
What do you mean by this trade off? Does this trade-off always exist in the health sector?
3. (a) My friend, who is a physician, was asked by a friend of his “…at what level of vision
do you do a cataract operation?” And he said “Well, if there’s one ophthalmologist in
town, then its 20/200. If there are two ophthalmologists in town then its 20/80. If there
are three ophthalmologists in town, then it’s 20/40.”
Based on this conversation, what are the implications for health policy?
(b) Indicate whether the following statement is true/false/uncertain. Explain your answer.
The uncertain nature of need for health care is one of the primary reasons some health
economists argue that we should not interpret the area under the demand curve for health care
as representing the value of health care to an individual.
4. Suppose there are 10,000 individuals facing an identical risk of illness (say 10%). If fell ill,
without insurance, an individual is expected to incur $20,000 in health care expenditures. If
they are risk averse, each would prefer to pay a $2000 premium and be compensated in case
they fall ill. Ignoring administrative costs, an insurance agency would break-even charging
each individual a premium of $2000. But suppose that, once they have full insurance
coverage and no longer have to pay any out-of pocket health care costs, each of those who
fall ill consume $25,000 in health care.
a) Did the insurer make any profit? Why or Why not?
b) If, anticipating this behavioural change, the insurer charges a premium of $2500. Would
it be profitable for the insurer? Why or Why not?
c) Instead of each of the 10,000 individuals facing an identical risk of illness (10%),
suppose that for one-quarter of them the risk of illness is 5%, for one quarter the risk is
15%, and for one-half it remains 10%. The total expected losses remain $20 million.
Suppose that the insurer still charges everyone the same premium of $2000 as he is not
able to identify which individuals face a risk of 5%, 10%, and 15% .What will happen
under such scenario?
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