Econ 352 Exam 2 Ch 5,6,9

How can government policy improve market outcomes?

-Control either the price, quantity, or quality of a product -Control the entry of new firms into the marketplace -Place a price ceiling or a price floor on a product.

What is the difference between conventional theory and Nyman's model?

-Conventional theory assumes that people purchase health insurance to avoid or transfer risk. (Insurance serves as a pooling arrangement reduced risk associated with aggregated losses) -Nyman model assumes people purchase insurance to have access to healthcare. (Pooling arrangement Ailing individuals to receive a transfer of income from those who remain healthy)

What is Coinsurance?

A consumer will pay a fixed percentage of the cost of health care, and the insurance carrier will pick up the rest of the portion. This effectively lowers the out-of-pocket price for health care.

What is a Deductible?

A fixed amount of health care costs per calendar year paid by a consumer before coverage begins.

What is a Copayment?

A fixed amount paid by the consumer for medical care under an insurance plan.

Why is consumer demand for medical care considered to be a derived demand?

Because people desire not medical care itself, but rather the fact that medical care leads to better health.

Who are the creators of demand?

Consumers

Why is the demand for medical care considered to be fuzzy?

Lack of medical knowledge Providers disagree about the treatment (Consumers lack the information to make informed choices) Rely heavily on the advice of their physicians Physicians, rather than consumers, choose medical services (Inability to accurately measure medical care)

Name 6 demand shifters that would cause the demand curve to shift

Number of Buyers Income Price of Related Goods Tastes Expectations Time Costs

Currently, insurance premiums are determined by a community rating and are based on the risk characteristics of the entire membership. True or false?

True

Describe the difference between "a change in demand" and "a change in quantity demanded".

When consumer demand changes, the demand curve shifts to the right or left, when quantity demanded changes, the point along the slope of the curve moves right or left depending on the quantity.

What are the unintended outcomes of price ceiling?

-Monopoly Market -Longer waiting lines -Non-price rationing (biases, corruption, etc.) -Reductions in the quality of care

What is the difference between proportional, progressive, and regressive tax?

-Progressive: Net taxes as a fraction of income increase with income: Federal income tax system -Proportional: Net taxes as a fraction of income remain constant with respect to income: medicare tax -Regressive: Net taxes as a fraction of income fall with income: sales tax

If a firm is increasing the price of its products and the total revenue is increasing, given everything else remains the same, is the demand for that product elastic or inelastic? What if the total revenue is increasing when the company reduces the price for a good, given everything else remains the same? How do we interpret the demand price elasticity?

1. Inelastic 2. Elastic 3. If the price matches the increase in demand, it is elastic.

Can you give four reasons why the demand for a particular product may be elastic or inelastic?

1. Portion of the consumer's budget allocated to the good 2. Decision-making time frame 3. Extent to which the good is a necessity 4. Availability of substitutes

What are the economic reasons for government intervention?

1. Promotion of the general interests of society as a whole 2. Restoration efficiency & promote equity 3. Enhanced efficiency and equity through laws and regulations

What is the difference between PPO, HMO, and CDHP? Which will most likely result in lower premium? Highest deductible? Smallest network? Biggest out of pocket expenditures? Biggest choice of doctors? Requires gatekeeping doctor referral?

A PPO does not require patients to select a primary care physician or get referrals, and allow a larger preferred provider network. An HMO requires patients to choose a PCP and must be referred to see a specialist. An HMO also has a specific network, such as Kaiser. A CDHP requires high premiums and is patient driven healthcare. A CDHP likely has the highest deductible, an HMO has the smallest network, a CDHP has the largest out of pocket expenditures, a PPO and CDHP has the highest choice of doctors, and an HMO requires a doctor referral.

How do we define equilibrium?

A certain price at which quantity demanded equals quantity supplied.

What is an externality? Negative vs. positive

A negative externality is when a product is usually under or overproduced with a negative outcome, such as cigarette smoking (marginal social benefit < marginal private benefit) or a negative effect that originates during the production process of a good or service. A positive externality is something that affects society positively, such as a vaccine (marginal social benefit > marginal private benefit) or something that is not paid for, but the individual benefits from the good.

What causes a movement along the supply curve?

A price change of the good itself. (Ex: If the price of MRI machines increases, the supply of MRI machines and services by that hospital will decrease)

Who of the three - a risk-lover, risk-neutral, and risk-averse individuals would not choose to purchase health insurance? Be indifferent between purchasing or not? Would purchase?

A risk lover would choose not to purchase insurance. A risk neutral individual would be indifferent to purchasing insurance. A risk adverse individual would purchase health insurance.

When do we have a shortage?

A shortage will occur if the price is set too low as compared to the equilibrium price.

When are the customers sensitive to price changes? When are they very insensitive to price changes?

Costumers are sensitive to price changes with greater elasticity, and are insensitive to price changes with inelasticity. Very steep demand curve if the price is inelastic and a more flat demand curve if the price is elastic.

How does individual demand curve for health insurance look like? Downward sloping? Upward sloping?

Downward curving, as price decreases, demand for healthcare increases.

How is the demand curve likely to look like if E=0? E<1? E=1? E>1? E=Infinite?

E=0: Perfectly inelastic demand: Graph straight vertical line E<1: Price Inelastic Demand: Graph is steep vertical line E=1: Unit Elastic Demand: Graph is curved E>1: Price Elastic Demand: Demand increases as price decreases, moving more horizontal E=Infinite: Perfectly elastic: Line is completely horizontal

Why does the marginal utility for medical care decrease?

Each successive unit of medical care generates a smaller improvement in health (Law of diminishing marginal productivity) Each increase in health generates a smaller increase in utility (Law of diminishing marginal utility)

How is own price elasticity related to revenues and expenditures?

Elastic demand: Price increases, TR decreases; Price decreases, TR increases Inelastic demand: Price increases, TR increases Unit elastic demand: no change in TR

How is own price elasticity related to the demand curve?

Greater elasticity means Quantity demanded is more sensitive to a change in price Flatter demand curve at any given price. Elasticity of demand varies with -Portion of the consumer's budget allocated to the good -Decision-making time frame -Extent to which the good is a necessity -Availability of substitutes

What does own price elasticity of demand measure?

How sensitive the consumers are to changes in price of a particular good. An addictive substance would be considered inelastic and a luxury good would be considered elastic.

Based on the study findings, is the demand for medical services more likely to be elastic or inelastic?

Inelastic, prices and income are often set and do not change in healthcare. Healthcare is often an urgent need, there is no time to make a decision.

What are the 4 shifters of supply that would cause a supply curve to shift?

Number of Suppliers Cost of Inputs Expectations Technology

If a price ceiling/price floor on hospital services is going to be effective, it must be set above/below the competitive market equilibrium price to prevent the market from driving the price up/down.

Price ceiling, below, up. price floor, above, down.

What is a price ceiling? What is a price floor? Which one will result in surplus vs. shortage?

Price ceiling: Maximum price that can be charged for a good or service. Creates a shortage. Price floor: minimum price that can be charged for a good or service . Creates a surplus.

What are the types for government intervention?

Provides public goods Levies taxes Corrects for externalities Imposes regulations Enforces antitrust laws Operates public enterprises Sponsors redistribution programs

Are reduced coinsurance rates likely to increase or decrease moral hazard costs and increase or decrease the risk exposure of the consumer? (Assume that greater consumer cost sharing will prevent inefficient moral hazard.)

Reduced coinsurance rates are likely to increase moral hazard costs and decrease the risk of exposure of the consumer.

What is a Moral Hazard?

Situation in which consumers alter their behavior when provided with health insurance (Ex: Insured individuals will take less precaution to prevent illness)

When do we have a surplus?

Surplus will occur when the price is set too high as compared to the equilibrium price.

When a complement of a given good becomes more expensive, what happens to the demand for another complementary good?

The demand decreases

When the average income in the economy is increasing, what happens to the demand for Botox? (Assume Botox is a normal good.) What happens for the demand for tooth extractions? (Assume that a tooth extraction is an inferior good.)

The demand for both increases.

When a substitute of a given good becomes more expensive, what happens to the demand for the given good?

The demand for the given good increases

When does a government choose to apply a corrective tax vs. a subsidy?

The government will choose a corrective tax on certain things that negatively impact the population, such as taxing cigarettes, or on negative externalities. They will subsidize things that positively impact the population, such as vaccines, or positive externalities.

What are the examples and objectives of antitrust laws? What are legal practices in violation of antitrust laws?

The objectives of antitrust laws: -Promotes competition among the firms within an industry -Prohibits firms from engaging in certain types of market practices that may inhibit efficiency EX: The Sherman Antitrust Act, 1890 clarified, reinforced, or extended by Clayton Act of 1914 Federal Trade Commission Act of 1914 Cellar-Kefauver Amendment of 1950 Price fixing, boycotting, and market allocation are legal actions.

What does the "law of demand" imply?

The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase. Law of demand: the claim that the quantity demanded (Qd) of a good falls when the price of the good (P) rises, other things equal. P => Qd

If employee wage increases by $1, that employee has to pay taxes out of it. If insurance benefits the employer provides increases by a dollar, it is exempt from taxes. True or false?

True

Insurance decreases the price for medical care, therefore increases the demand for it. True or false?

True

John Nyman argues that, classic economic theory is flawed since it overstates the degree of overconsumption of medical services by considering the fact that there will be only inefficient moral hazard. According to Nyman, both efficient and inefficient moral hazard may occur. True or false?

True

Since pooling arrangement by an insurance company is a large scale operation, it allows to distribute the risk among many subscribers. True or false?

True

Assume that a government decides to subsidize HPV vaccinations in an attempt to correct a market failure. Without this government intervention, the HPV vaccination would most likely be overconsumed/underconsumed due to the presence of positive/negative externality

Underconsumption. Positive Externality.

Can you draw perfectly elastic demand curve, elastic demand curve, unit elastic demand curve, inelastic demand curve, and perfectly inelastic demand curve?

http://www.economicsonline.co.uk/How%20markets%20work%20graphs/PES-graphs.png

What goods are called public goods?

nonexludable and non-rivalrous goods, such as fresh air, street lights, and water.