ECP4530 ECP5536 Showman You may use a 4 function calculator but you may not use a scientific calculator Test 2 Outline Test Format This test is worth 500 points 25 of your class grade 18 short answer questions worth 20 points each 1 essay question worth 100 points each Graphing or math questions worth a total of 125 points Topics Covered The test is cumulative One hundred points will come from material covered before Test 2 and 400 points will come from the material outlined below Problems and Graphs Demand for health care and moral hazard Solve supply and demand equations for equilibrium price and quantity Interpret results For this section go through these questions and answers Email me if you need any extra help 1 Suppose that Rocko s demand for medical care is summarized by the demand curve P 10q 100 Assume the actual market price for medical care is 40 This is a problem about an individual consumer s response to insurance Notice that since Rocko is only one person he takes the market price as given a How many services does Rocko buy if he has no insurance P 10q 100 40 10q 100 q 6 Expenditures Pq 40 6 240 So you re putting in the market price of 40 in for P then solving for q b What are his total expenditures if Rocko has no insurance Remember that expenditures p times q c Rocko buys insurance with a 50 coinsurance rate i Find his new demand curve You multiply P by the percentage 50 0 5 then simplify ii How many services does Rocko buy 0 5P 10q 100 P 20q 200 P 20q 200 40 20q 200 q 8 Put the market price in for P then solve using your new demand you found in i iii What are his total expenditures Rocko pays 20 8 160 Insurance company pays 20 8 160 Total 320 P times q for both the individual and the insurance company You know each pay 50 because of the coinsurance rate of 50 d Rocko buys insurance with a 10 copayment i Find his new demand curve 10 10q 100 q 9 Substitute in 10 for P then simplify ii How many services does Rocko buy 9 Easy peasy This is the simplified version in i q 9 iii What are his total expenditures Rocko pays 10 9 90 Insurance company pays 30 9 270 Total 360 Individual pays the copayment amount 10 and insurance pays the additional amount 40 10 30 2 Imagine that the market demand for Botox in LA can be summarized by the demand function Q 500P 600 000 and the market supply curve is Q 250P 10 000 This is a problem about market demand and insurance Notice that the equilibrium market price changes and quantity supplied increases as demand increases The supply curve however does not shift a Calculate and graph the market equilibrium when there is no insurance in the You re setting the two equations equal to each other then solving for P To find Q plug P back into either of the two given equations b Calculate and graph the market equilibrium when consumers have 30 market 500P 600 000 250P 10 000 P 813 33 Q 500P 600 000 Q 500 813 33 600 000 Q 193 333 P 1200 813 40 S D Q 193 333 coinsurance New demand curve Q 500 0 3P 600 000 Q 150P 600 000 150P 600 000 250P 10 000 P 1 520 Q 150 1520 600 000 Q 372 000 P 4000 1520 40 S D Q 372 000 Still solving for P by putting the two equations equal to each other but this time you multiply P by the coinsurance rate within the equation 30 0 3 Then solve for Q by plugging P back into either equation c Calculate and graph the market equilibrium when consumers pay a 25 co pay per service Be sure to label your intercepts and the equilibrium point New demand curve Q 500 25 600 000 Q 587 500 587 500 250P 10 000 P 2 390 P 2 390 40 D S Q 587 500 Again still setting two equations equal to each other then solving for P You plug 25 in for P in the demand equation then continue as before Objectives Overtreatment Summary of 4 articles If You Feel Okay o We screen for too many diseases too often in healthy asymptomatic people o Overdiagnosis and overtreatment lead to higher costs false positives anxiety and o Hospitals and doctors do it because they re risk averse and they care Also they drug side effects get more money o We get true health improvement from healthy diet exercise and not smoking o So doctors can help you but so can trainers and dieticians Heart Treatment Overused o Two studies o Angioplasty heart stent costs 20 000 and there are 600 000 per year o Heart attacks 420 000 per year Then angioplasty is appropriate o In people with mild no symptoms 180 000 heart stents angioplasties per year When this treatment isn t always appropriate Doesn t save lives or prevent heart attacks A combination of drugs would work and be less expensive o New cancer drugs emerging that treat very specific types of cancer these are not Costly War on Cancer chemo o Targeted towards few people and are very expensive Provenge costs 93 000 for an additional 4 moths of life and Yervoy costs 120 000 for 3 5 months o Britain s NICE system rejects these new drugs which upset many people So they created a separate fund to pay for expensive oncology drugs o The US doesn t consider price when deciding coverage Oncologists are paid more the more expensive the drug is so they have an incentive to provide it and patients have little reason to demand cheaper drugs o Private insurers have started to make people pay for a larger share of their drug bills but drug companies often help pay the patients share keeping people from getting angry about rising prices Therefore demand is largely inelastic o America s propensity to pay has one benefit it encourages investment in research o Doctors and their own care they have access to the best drugs surgeons hospitals and doctors However they choose less end of life care than non doctors They ve seen probability in action seen side effects and care more about quality than years of extended life Why Doctors Die Differently HIV AIDS o Compare the recommendations of international health organizations and economists about funding HIV AIDS prevention and treatment in low income countries International health agencies World Health Organization World AIDS conferences UN program on AIDS HIV US Emergency plan for AIDS relief spend more on treatment than prevention Economists know that resources are limited they compare cost effectiveness To maximize health outcomes we should pursue only the most cost effective measures Burden in Africa o 7 2 prevalence rate overall 20 in some countries o Deaths concentrated among young adult women and middle aged men o Doesn t reduce GDP per …