Solution Manual for The Economics of Health and Health Care, 7th Edition

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The Economics of Health and Health CareSeventh EditionInstructor's Answers

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FGS7 Answers -1Chapter 1 - Introduction3. From 1960 to 1980, Spain’s share increased from 1.5% to 5.3%, an increase of 253%, the largestpercentage increase. Canada’s share increased from 5.4% to 7.0%, an increase of 30%, the smallestpercentage increase.From 1980 to 2009, Korea’s share increased from 3.4% to 6.9%, an increase of 102.9%, the largestpercentage increase. Sweden’s share (from 1980 to 2009) increased from 8.9% to 10.0%, anincrease of 12.4%, the smallest percentage increase.5. From 1960 to 2009, the CPI grew from 82.4 to 214.5 or by 160.3%. From 1980 to 2009, theHospital and Related Services index grew from 69.2 to 567.9 or by 720.7%. From 1960 to 2006 thePhysician Services index grew from 76.5 to 320.8 or by 319.3%.6. From 1970 to 2009, Private Health Insurance grew by a multiple of 50.87 or 4,987%; Medicareby 64.56 or 6,356% ; and Medicaid by 69.14 or 6,814%.

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FGS7 Answers -2Chapter 2 - Microeconomic Tools for Health Economics1. An improvement in the technology of producing health would increase the health intercept. Anincrease in available productive resources would increase both intercepts (i.e. the entire curvewould shift outward).2. Inefficiency will be shown by an interior point (A) in a production-possibility diagram (FigureE2-1).Two efficient combinations are shown by B and C.The cost is the decrease in production of other goods (opportunity cost), moving from point B topoint C. The amount of other goods given up is shown by BD.3. a. Increase in supply leads to lower equilibrium price and higher equilibrium quantity.b. Same as (a).c. Decrease in demand leads to lower equilibrium price and lower equilibrium quantity.d. No effect on equilibrium price and quantity, but if the ceiling price is below the equilibrium pricethere will be excess demand.4. a. This curve is linear.b. This curve is curvilinear.

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FGS7 Answers -35. The Food axis (horizontal) shows the maximum quantity of Food if all income is spent on food(i.e. none on health services). The reverse holds for the OG axis (vertical).The budget constraint will be unaffected if the income level and both prices double.6. Elasticity is -1.5 x (300)/1050 = -0.43. The parameter -1.5 is the coefficient of the demandrelationship.7. This problem should refer to the Table 2-5. The slope is -17.2, i.e. the reduction in the amount ofcapital.8. As noted in the Figure E2-2, the equilibrium price does not rise by as much as the tax. A firmwill move up the MR curve by the amount of the tax, but this does not lead to an equal priceincrease. With a linear demand, the slope(ΔP/ΔQ)of the MR curve is twice the numerical value ofthe slope of the demand curve. Thus the price increase will be 50% of the tax.9.Qd= 1810 - 10ps.Qd= 1910 - 10ps.

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FGS7 Answers -4Chapter 3 - Statistical Tools for Health Economics1.Age 35 or less; mean = 2.39Over age 35; mean = 4.832.Age 30 or less; mean = 2.00Age 30 - 45; mean = 3.14Over age 45; mean = 8.253.Q= 5.32 - 0.92PR2= 0.189Q= 1.54 + 0.08YR2= 0.095Q= -2.80 + 0.17AR2= 0.5364.Q= -1.63 - 0.55P+ 0.03Y+ 0.15A(2.04)(1.01)(5.04)R2= 0.620(t-statistics in parentheses)PandAare significant at 5% level;Yis not.Elasticity at meansMeanElasticityMeanP2.116666-0.332MeanY21.758620.217MeanA36.607141.592MeanQ3.481485. Assuming G = 0,ElasticityP2-5.86Y203.57Po36.86Q1.4

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FGS7 Answers -56.Elas (P)Elas (Y)Qa19-0.2630.211Qb29-0.1720.138Elasticities for group (b) are smaller, because 1 unitincrease is a smaller pct of a larger amount.7. If price rises by $1, demand decreases by 3.3.Initial Q is350Percent Change-0.94%If income rises by $1, demand increases by .001.Percent Change0.0003%8. Good Z is a substitute. An increase in the price of Z leads to an increase in the quantitydemanded of X.We cannot be confident about good X as a normal good, because the income coefficient isstatistically insignificant.9. a. Cigarette consumption decreases as income rises, although the impact does not differsignificantly from zero. By this criterion cigarettes are a “necessity” and might be considered as an“inferior good.”b. Multiply the coefficient -0.67 by 3, that is (12 – 9). This indicates that college graduatesconsume 2.01 cigarettes less than high school graduates.10. The answer to this question depends critically on what seems to be an outlying, but apparentlycorrect, value for Luxembourg, with a PPP-adjusted income of 91,377 and PPP- adjustedexpenditures of 4,808.Including Luxembourg in the regression gives,

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FGS7 Answers -6Mean GDP per capita35248.93Mean expenditure per capita3361.356RegressionExpenditure = 607.2947 + 0.078 * GDP per capitaElasticity = 0.078 * (35248.93/3361.356) = 0.82This would show health expenditures as a “necessity,” because the elasticity is less than 1.0. Anincreased income would imply a reduced share.Excluding Luxembourg,Mean GDP per capita33244.35Mean expenditure per capita3309.698RegressionExpenditure = -1483.81 + 0.144 * GDP per capitaElasticity = 0.144 * (33244.35/3309.65) = 1.45This would show health expenditures as a luxury, because the elasticity exceeds 1.0, with anincreased income implying an increased share.Instructors can use this example, if they wish to explain to students the importance of outliers.

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FGS7 Answers -7Chapter 4 – Economic Efficiency and Cost Benefit Analysis1. At that point, the marginal social cost exceeds the marginal social benefit.2. Assume that all costs and benefits are incurred at the end of the period.Project 1Project 2YearCostsBenefitsNet@6%Net@12%YearCostsBenefits Net@6% Net@12%150002000-2830.19-2678.57150000-4716.98-4464.292020001779.991594.392000.000.003020001679.241423.563000.000.004020001584.191271.044000.000.005000.000.005000.000.006000.000.006020001409.921013.267000.000.007020001330.11904.708000.000.008020001254.82807.779000.000.009020001183.80721.2210000.000.0010020001116.79643.95Sum2213.231610.41Sum1578.47-373.39Project 1 is preferable in each case.The project with the later returns is more competitive the lower the discount rate.3.a. Using the criterion of marginal benefit equaling marginal cost, the efficient level of abatementis 50. The marginal benefit (40) of going from level 50 to level 60, is exceeded by the marginalcost, which is 45.b. Yes, because total benefits exceed total costs. It is not efficient.c. Even the total costs exceed the total benefits. Moreover, any level above 50% is noteconomically efficient.4.ProjectYearCostsBenefitsNet@6%Net@5%Net@ 4%0100000-10000.00-10000.00-10000.001040003773.583809.523846.152035003114.993174.603235.953035002938.673023.433111.49Sum-172.767.56193.59Not approved at 6% discount rate.Approved at 5% discount rate.Approved at 4% discount rate.

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FGS7 Answers -85. Average Cost/CancerStage 1 - $2,000Stage 2 - $2,476Stage 3 - $2,830Marginal Cost/CancerStage 1 -$2,000Stage 2 - $12,000Stage 3 - $40,000Stage 1 is the optimal level of screening.6.a. $1000b. $600c. $750d. $400e. $11507.a. CS = ½ x 15 x 100 = 750; PS = ½x 8 x 100 = 400; Total surplus = 1150b. You're looking at the loss of CS. If Q is limited to 90, the WTP (inverse demand) is 11.5 (90% ofthe linear distance between 25 and 10). So, the loss of surplus is ½ x (11.5 - 10) x 10 = 7.5. CSfalls from 750 to 742.5.Total loss in surplus includes loss of PS as well. Loss of PS (calculated similarly) is½x (10-9.2) x 10 = 4, so PS falls from 400 to 396.Total surplus falls from 1150 to 1138.5.

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FGS7 Answers -9Chapter 5 - The Production of Health1.E=10E=15HCHSMPHCHSMP00.00000.000156.05456.054163.30563.305279.27323.218289.52626.222397.08917.8163109.64720.1214112.10815.0204126.60916.9625125.34113.2335141.55314.9446137.30411.9636155.06413.5117148.30511.0017167.48812.4248158.54510.2408179.05211.5649168.1629.6179189.91410.86110177.2599.09610200.18710.27311185.9118.65211209.9579.77112194.1778.26712219.2939.33613202.1067.92913228.2488.95414209.7357.62914236.8648.61615217.0977.36115245.1788.314Health Production050100150200250051015Health CareHealth StatusHS(E=10)HS(E=15)

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FGS7 Answers -102. For blacks, every factor except BCHS.For whites, WIC, abortion, and prenatal care.These may reflect lower incomes and educations.5. The plot confirms the Prichett and Summers finding.GDP per capita v. Life Expectancy (in years)0102030405060708090010,00020,00030,00040,00050,00060,00070,00080,00090,000GDP per capitaLife Expectancy (in years)Life Expectancy (in years)AfghanistanNigeriaEthiopiaIndiaRussian Fed.BangladeshAlbaniaGermanyBrazilUSNorwayChina

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FGS7 Answers -11Chapter 6 - The Production and Cost of Health Care1. Figure E6-1 shows a family of isoquants with varying elasticities of substitution.2. In Figure E5-1:Slope of0A= initialK/Lratio for both.Slope of0B= newK/Lratio with limited substitutabilitySlope of0C= newK/Lratio with high substitutability.The isoquant with the higher substitutability shows a greater change in theK/Lratio, and hence ithas a higher elasticity of substitution.3. Elasticity of substitution is zero.4. a. Constant returns to scale. Costs/unit of output are constant.

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FGS7 Answers -12b. Increasing returns to scale. Costs/unit of output decrease.c. Yes, because the costs of producing goods 1 and 2 jointly are less than the costs of producinggoods 1 and 2 individually.5. Nothing will happen to the expansion path because the slopes of the isocost curves do notchange. The average cost curve will double.6. Examine, for example, point 8. Input reduction distances would be the distance (dashed) along aray to the efficient isoquant (Q= 100). Output distance would be the measure of output availablewith the given amounts of labor and capital under efficient production (dashed isoquant at Q′>100).7. Increased communication does not necessarily imply adoption. Communication may encourageor discourage innovation. The key issue is whether the innovation is more profitable more efficient,or more acceptable to the provider’s professional image.8. We derive the average costs by measuring the slopes of rays from the origin to the total costcurve. These rays decrease in slope(increasing returns to scale) up to Q of approximately 125, andthen increase in slope (decreasing returns to scale) as Q increases above 125.E796810KLQ = 100Figure E6-2 – Exercise 6Q′> 100

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FGS7 Answers -13Chapter 7 - Demand for Health Capital1. Figure E7-1 shows the limiting cases of perfect substitution (negatively sloped straight line) andno substitution (right angle).2. Figure E7-2 shows how the individual would spend all of his or her income on health (that is, acorner solution at E).3. Refer to Figure 7-65 (text), with an increase in demand, due to higher wage. The cost of capitalmust be lowered due to the decreased depreciation rate.Figure E7-1 – Exercise 1Figure E7-2 – Exercise 2

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