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ECP4530 Final Exam Study Guide Test 1 Material Production Possibilities Curve involves opportunity cost the value of the next best alternative that is given up The question is what should be produced what combination of medical goods and what types of medical goods Present value calculation and explanation of discount rate PV F 1 r Example adult saving for retirement has a discount rate of 2 per year and is indifferent between 294 now and 300 next year The formula to show this would be 294 300 1 0 02 Note Utility is a function of health and health is a function of medical care o Total product of medical care health inputs medical care technology profile environment socioeconomic status lifestyle described in detail below More medical care makes a movement up along the curve All others shift the curve completely All described in detail below health TP Medical care o Know what shifts the curve and when to move along it this is all listed in the explanations in the review below Valuation of life human capital approach willingness to pay all listed below Health utility index HUI QALY LY quality adjusted life years life years o Rating method HUI individuals were asked to rate various health outcomes then researcher converts responses on a scale of 0 1 1 is perfect health o Standard gamble individual is offered two outcomes less than perfect health with probability 1 or medical procedure with probability of success of pi If success then perfect health If failure then death Indifferent pi is the value of health utility index Basically what is the probability pi that makes you indifferent between living with imperfect health and getting the procedure with the risk of death o Time trade off individual offered two outcomes perfect health for x years or less than perfect health for y years where y x Indifferent x y is the value of the health utility index CBA present value PV F 1 r Also when discounting over multiple time periods use this formula NB T t 0 CB t t t 1 r CEA ICER ratio ICER cost new cost old E new E old E is effectiveness usually measured in life years CUA ICER ratio ICER cost new cost old QALYs new QALYs old QALY is a quality adjusted life year The Preston Curve o Define the terms health care and health insurance and explain the difference health care goods and services that maintain improve and or restore your physical social or mental well being Health insurance a promise of compensation for specific potential future losses in exchange for a periodic payment Designed to protect financial well being in the case of illness or bodily injury The definition of health insurance changes over time and changes due to policy and law o Express why U S health insurance tends to be employer provided It is simply a result of history In World War II there was a wage freeze so since companies had to freeze wages they offered health insurance Pros little bit cheaper price for consumers because of economies of scale Cons limited options if lose job then lose insurance job lock o Explain how incentives change when people have insurance this is an example of moral hazard when individuals change their behavior because they are protected from risk Like if you have a poor diet because you know you can just take cholesterol pills An example of this is the Peltzman effect when the potential benefit of a safety regulation is offset by an increase in risky behavior such as seat belts They are safer but people then get in more accidents o List and describe the causes of market failure 1 Lack of competition when firms have market power Too little produced and price too high Results from high entry barriers copyrights control over inputs specialized knowledge consumer preferences and natural monopolies 2 Externalities when third parties are impacted by the actions of a buyer or seller Arises as a result of imperfectly defined property rights Negative externalities occur when third parties are harmed by actions of buyer or seller too much produced price too low Positive externalities occur when third parties receive a benefit from actions of buyer or seller too little produced price too high 3 Public goods must be both non rival in consumption making a good available to one consumer does not reduce its availability to others and non excludable impossible to exclude non paying customers from receiving the good Example national defense Private goods are both rival in consumption and excludable Just because a good is publicly provided doesn t make it a public good Example health care health insurance education mail delivery parks 4 Lack of information imperfect information both buyer and seller lack important information about the good or service or asymmetric information one party has more information than the other o Evaluate the government s ability to improve economic efficiency very difficult For lack of competition they could make the monopolist lower their price and increase quantity But they d say no and exit the market For negative externalities the government could create a tax For positive externalities government could subsidize In theory we probably won t agree on the size or direction of the externalities For public goods the government could help to provide the public goods but it s hard to agree on how much to produce For information problems government could mandate products such as the FDA But this makes the process very expensive and slows it down Chapter 1 o Distinguish between positive and normative statements Normative opinions about what should be Positive hypotheses about what will happen they can be proven true or false o Discuss 4 social justice theories 1 Utilitarianism goal is to maximize the sum of utilities The greatest good for the greatest number of people U utility of all members 2 Rawlsian goal is to choose the economy society where the worst person is the best off Society is only as good as its weakest link Maximize utility of the worst off U utility of the worst off member 3 Egalitarian goal is to minimize variation in utilities incomes health status Equal distribution of resources U 1 variance in member utilities 4 Libertarian goal is to minimize disruptions in freedom Maximize voluntary exchanges U freedom o Interpret efficiency equity trade offs An economic situation in which there is a perceived tradeoff between the equity and efficiency of a given economy This tradeoff is commonly viewed within the context of the production possibility frontier where any additional


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FSU ECP 4530 - Test 1

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