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Economics 7550 – Fall 2007

Final Exam

Dr. Goodman

You are to do all six (6) problems. Each one receives equal credit and each part of each one receives equal credit, so allocate your time accordingly. Partial credit will be given if appropriate. Set up each problem as carefully as you can, and show the steps to solution if you cannot actually solve it in the short time that the test takes.

I am unlikely to give any help during the exam unless a question is clearly misleading, so you should make clarifying assumptions and proceed with your analysis. Any incidents of cheating will result in a 0 on the exam. Please don’t do it! Good luck!

  1. Suppose that John starts the year with 20 QALYs and Mary starts the year with 10 QALYs. Starting from there, if ALL of the resources are allocated to John, he will get 10 additional QALYs, and if all of the resources go to Mary, she will get an additional 20 QALYs. The trade-off between them is linear.
  1. Sketch out a diagram below that describes the problem as given. .
  1. If society believes that by the end of the year, John and Mary should have the same number of QALYs, what percentage of the year’s resources will go to John and what percentage will go to Mary? How many QALYs will each have?
  2. If society gives equal inputs to John and Mary, how many QALYs will each have at the end of the year?
  1. If society wishes to maximize the total number of QALYs by the end of the year, what will the allocation of resources be?

  1. Equity has important implications in the allocation of health resources.
  2. Draw an Edgeworth Box which shows an economy with the following resource allocations:

Total Health ResourcesH = 100

Total Food Resources F= 200

Sara and Rachel each have 50 units of H and 100 units of F.

  1. Sara’s utility function is US = Hs0.25Fs0.75. Rachel’s utility function is UR= HR0.75FR0.25. Is the current allocation economically efficient for the two of them? Why or why not?
  2. Sketch out a market transaction that could lead to a Pareto Improvement. Discuss this transaction briefly.
  3. How does this set of circumstances address tradeoffs between efficiency and equity?
  1. In several models throughout the year, we have talked about the trade-offs between quality and quantity in the provision of health services.
  1. Give two examples of quantity and two examples of quality with reference to nursing home, and explain why your examples represent either quantity or quality, but not the other.
  2. As briefly as you can, sketch out either a graphical or a mathematical model that shows why, in cases that matter, there is a trade-off between quality and quantity.
  3. Studies that have compared for profit and non-profit nursing homes have often found them to have similar when competing in the same markets. What economic factors might lead this to be the case?
  4. Sketch out the equilibrium where you have non-profit providers who care only about how many patients they see.

  1. Dr. Goodman wanted to look at the determinants of the share of GDP going to health expenditures, so he estimated the following regression for 2004.

Coefficients / Standard Error / t Stat
Intercept / 5.60057 / 1.47821 / 3.79
YPC / 0.06473 / 0.03230 / 2.00
Age / 0.10056 / 0.10542 / 0.95

where the dependent variable (SHARE) is the fraction of the GDP going to health care expenditures.

YPC = Income per capita in $ x 1,000

Age = % of population age 65 and over

  1. Assume that the mean value of Age is 10. What is the impact of an increase in YPC from 20 to 30 on SHARE?
  2. From this regression, is health care a luxury good or a necessity? Why?
  3. Does Age have a significant impact on SHARE? Why or why not?
  4. The United States has a mean value of 40 for YPC, and 12.8 for Age. Knowing what you know about the U.S. healthcare economy, does this regression do a good job predicting the share of GDP going to health care? Why or why not?

  1. Program effectiveness is often evaluated in terms of the concepts of “take-up” and “crowd-out”.
  1. Briefly define take-up and crowd-out.
  2. Suppose Bob has utility function U = C0.9I0.1 and Ralph has utility function V = 5C0.2I0.8. Plot Bob’s and Ralph’s equilibrium points on the accompanying diagram.
  3. Suppose that Medicaid offered 15 units of insurance I without charge instead of the current insurance plan. Would Bob move to the Medicaid plan? Why or why not?
  4. If Medicaid offered 15 units of insurance I without charge instead of the current insurance plan, would Ralph move to the Medicaid plan? Why or why not?
  1. This question refers to the term paper that you wrote for this class.
  1. State briefly the hypotheses that you tried to examine in the paper?
  2. Did you use cross-section, time-series, or panel data, and why?
  3. Did your findings support or refute your hypotheses. Discuss your answer.
  4. If you were seeking to make this paper publishable in the journal Health Economics, and you had an additional 2 months to work on this (with no other obligations), what would you attempt to do in order to improve it? (Hint: Asserting that your work needs no improvement will garner you 0 points on this part).