Homework Assignment 2

Due on Tuesday, January 22, 2008

  1. You are chairperson of a state tax commission responsible for establishing a program to raise new revenue through excise taxes. Would elasticity of demand be important to you in determining those products on which excises should be levied? Explain.
  2. When the price of compact discs (CDs) increased from $10 to $11, the quantity of CDs demanded decreased from 100 to 87. What is the price elasticity of demand for CDs? Is demand elastic or inelastic? (Use midpoint formula)
  3. For each of the following goods, indicate whether you expect demand to be inelastic or elastic, and explain your reasoning.

a)  opera:

b)  foreign travel:

c)  local telephone service:

d)  video rentals:

4. Because of a legal settlement over state health care claims, in 1999 the U.S. tobacco companies had to raise the average price of a pack of cigarettes from $1.95 to $2.45. The projected decline in cigarette sales was 8 percent. What does this imply for the elasticity of cigarettes? Explain. Mrs. Wilson buys loaves of bread and quarts of milk each week at prices of $1 and 80 cents, respectively. At present she is buying these two products in amounts such that the marginal utilities from the last units purchased of the two products are 80 and 70 utils, respectively. Is she buying the utility maximizing combination of bread and milk? If not, how should she reallocate her expenditures between the two goods?

5. Outsourcing Inpatient Care to India

The Wall Street Journal, Monday April 26, 2004.

Global health care has arrived. During 2003, Canadian resident Terry Salo flew to India to have his hip replaced. He paid only a quarter of the cost of similar treatments in the U.S. and shaved a year off his waiting time for free care in Canada. The very satisfied Mr. Salo played golf a month later.

Mr. Salo is not alone. Sixty thousand foreign patients flocked to India’s Apollo Hospitals to obtain cheaper and quicker medical care than was available in their home countries. Apollo, founded in 1983 as a single hospital, has grown into a 37-hospital chain with 6,400 beds and marketing offices in London and Dubai. Apollo’s overall private mission is to provide world class health care to India but also profit by substituting high end medical care to Western patients at a fraction of the cost.

Apollo also conducts patient billing for U.S. firms and does clinical trials for large pharmaceuticals. Another area of company expertise is “medical tourism.” A patient can schedule a seaside resort vacation to convalesce from their surgery as soon as they are well enough to travel. The consulting firm McKinsey and Company expects this combination of medical care and tourism in India to approach $2 billion a year by 2012.
Open - ended questions:

a)  How does the concept of elasticity of demand relate to this topic?

b)  How can the same health care procedure be a necessity for one individual and a luxury for another individual?

c)  How will the issues discussed in this article impact health care elsewhere?

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