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IntroHealthEcon Notes Columbia

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Health economics notes Tal Gross ã PLEASE READ ALL INSTRUCTIONS BEFORE BEGINNING THE EXAM! ã All exam answers must be submitted before class on Monday 10/30/14 via Courseworks. ã No late exams will be accepted. ã All pages of exam responses must have your name and UNI on them. ã All exams must be posted in PDF Format. ã All files submitted should include your name in the file name (i.e. ELKINS L – Healthcare finance midterm.doc) ã Please complete exam answers on this document. Clearly indicate your final answer for each question. Add space between questions as needed. ã You should show all formulas used and should show your work. You may choose to provide an excel file with your work. Partial credit may be given but only if all work is provided. (Note: The excel file is not required.) ã Numbers in Parentheses represent the possible points for each question or subquestion.
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  LECTURE 9/11/14 ● Consumer Choice (Assumes a rational consumer) ○ Individual demand curve (Figure 2) ■ When the price of food goes up, consumer (she) consumes less food ○ Law of Demand ■ If the price of something goes up, a consumer will want less of it ■ Curve will always slope downward ● Difficult to find counterexamples ○ Expensive sushi vs cheap sushi ■ Not disproving the law of demand; other aspects of the good are changing (quality) ○ High fashion example ■ Expensive purses; high price signifies a sense of social status, not necessarily related to the law of demand ○ Potential scenario where healthcare is so important to a consumer that price does not affect to demand ■ Consumer has an individual utility set and a budget set that allows the figure to be formed ○ Market demand curve (Figure 3) ■ Horizontal sum of all individual agent demand curves ■ Describes how consumers react to price and price changes ● Shifts to the right if consumer has more capital to spend; shifts to the left if consumer has less capital to spend ○ Consumer will want more quantity if they can afford it ● Competitive Firm’s Choice ○ A firm’s goal is to maximize profits ■ Profit = price x quantity - cost(quantity) ● Profit = p x q - cost(q) ■ Costs can either be fixed or variable ● Fixed costs do not depend on quantity ○ Rent for office space is a fixed cost (does not depend on quantity of good produced) ○ For an imaging center, the imaging unit is a fixed cost that does not matter on how often it is used ● Variable costs vary with output ○ For a physician, the more patients you see the more needles/tongue depressors you need to buy ○ For a primary care physician, time is a variable cost ■ Average cost vs. Marginal cost ● Average cost = total / goods produced ○ Avg. Cost = total/g  ● Marginal cost is the additional cost of producing the next good ○ In an imaging center, marginal cost would be time spent with a receptionist or a gown that they need to wear during an MRI ■ Could be high or low ■ Leads to a debate over consumer responsibility in health policy with businesses that operate with a large fixed cost and small marginal cost ● Are consumers responsible for covering the fixed cost? ○ For a physician, the marginal cost for seeing an additional patient is high ○ Problem faced by firms (Figure 4) ■ Market price vs. quantity produced ■ Marginal cost (MC) is an upward sloping line ● Intersects AC at its minimum ■ Average cost (AC) is U-shaped ● If too little or too much is produced, AC remains high ○ Cost of production ■ Economies of scale (downward slope of AC) ● As you increase production and produce more, average price goes down ● Linked to higher efficiency in mass production ● Reason why hospitals are very large ■ Diseconomies of scale (upward slope of AC) ● Average cost begins to rise to account for overproduction ■ Firm will graph the price with a horizontal line (B-C) ● Until the price intersects MC, a firm will want to produce more quantity ○ At that intersection, the firm becomes indifferent towards increasing production ● Maximizing profits on the margin ■ Individual supply curve ● Determines the amount produced by the firm based upon market price ○ Based on maximizing profits on the margin ○ Supply vs Demand (Figure 5) ■ Competitive equilibrium ● Intersection between supply and demand ● Describes the competitive price and competitive quantity ● At this price and quantity, there is nothing wasted ○ Just as many producers want to sell the good as consumers want to buy the good  ■ Consumers get richer (Figure 6) ● Start out with a competitive equilibrium and then the consumers gain more capital ○ Curve shifts to the right as price of product increases with higher income levels ■ Producers become more efficient (Figure 7) ● At any given price, suppliers can produce more of the good and leads to lower prices and higher quantity ● Think of technological advancements for farmers (tractors, pesticides, better seeds, etc) ● Food in Zimbabwe (Figure 8) ○ Before changes were made, Zimbabwe had a competitive market ○ Rule comes in that creates a price ceiling ○ Leads to a shortage in goods (food) ■  Winners : Consumers who can find food ■  Losers : ● Producers ● Consumers who cannot find food ● Mis-allocation problem? ○ Under a free market, allocation of resources is based upon a willingness and ability of consumers to buy goods (pay) ○ In a low-income country like Zimbabwe, the price ceiling installation was put in place with the hope that the hungriest had access to food ■ Ended up being more random where allocation of a scare resource led to not enough people having access ■ Can lead to a black market where producers sell goods based on a normal supply and demand curve ● Apartments in NYC ○ New York City in the 1950s had a policy of rent control (eventually became rent stabilization) ■ Government capped rent because of rising prices ■  Winners : Consumers who could find apartments ● Able to buy good for a low price ■  Losers : ● Producers (landlords) ● Consumers who are unable to find apartments ○ Leads to a shortage of apartments ● Still suffers from the possible mis-allocation issue ○ Policy in place may not help the consumer group that needs it ○ Wall Street Journal article about rent control in Mumbai  ● Applications relevant to healthcare ○ The market for crystal methamphetamine ■ May be a competitive market without much friction ● Locally produced by small firms ■ Displays a normal supply and demand curve ● If the DEA were to raise regulations against the availability of chemicals needed to make meth ○ Supply would decrease and prices would increase ■ Study on crystal meth sales ● Relied on dealer arrests to graph the going rate of meth per gram, forming a comparative purity vs price comparison ● Price and supply went down immediately after the new regulations were instituted but eventually returned back to normal levels ○ Food supply and obesity ○ Prices before a hurricane ■ Gas stations are prevented from “price gouging” or raising the price of gas based upon an increase in demand in Long Island ● Prices remain the same, supply eventually is depleted ● Government-imposed price ceiling leads to distinct winners and losers ■ Normally, prices would increase before a hurricane according to supply and demand curves ○ Famine in Bangladesh (Rice prices) ■ Before 1974 famine, price increases accordingly with wages ■ After 1974 famine, price skyrockets unless more product is added to the system (via foreign aid) ■ NPR story on how foreign aid hurts patient farmers ● Discussion questions 1. The ACA more-or-less provides comprehensive health insurance to everyone. How would this affect the amount of health care consumed? a. Will increase the amount of health care consumed. Demand curve will be shifted to the right. 2. Suppose that more undergraduates decide to become physicians. What happens to the price of health care? a. Will increase the amount of supply. Supply curve will be shifted to the right. ● Economic rent-seeking ○ Artificial profits that occur only when competition is restricted ○ Suppliers in a market convince the government to limit competition ■ NYC Yellow Cabs and their silver medallions ● Medallion is worth exponentially more than the cab itself ● Government sells a limited amount of medallions
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