ECON 352 Exam #2

What goods are called public goods?

Local events such as parades and fireworks are considered public goods because they are nonrival in consumption, nearly non-excludable, funded by tax dollars Private sector is unwilling to produce public goods due to the lack of profit of bystanders

When are the customers sensitive to price changes?

When a good is elastic or the demand curve is flatter

When are they very insensitive to price changes?

When a good is inelastic or the demand curve is steeper

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 over consumed/under consumed due to the presence of positive/negative externality.

Without the government subsidizing the preventive measure of HPV vaccinations, the service would be over-consumed due to the presence of negative externality

Who are the creators of demand?

consumers

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

downward-sloping

What if the total revenue is increasing when the company reduces the price for a good, given everything else remains the same?

elastic

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

false

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

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

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?

inelastic

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

E=0 => perfectly inelastic demand E<1 => inelastic demand E=1 => unit elastic E>1 => elastic demand E=∞ => perfectly elastic demand

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

-Availability of substitutes -Relative importance; what portion of consumer's budget is allocated to the good -Necessity v.s. Luxury -Change over time; decision-making time frame

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.)

-Because Botox is considered a normal good, with an increase in average income in the economy, consumers will demand more Botox -Because a tooth extraction is considered an inferior good, with an increase in average income in the economy, consumers will demand less tooth extractions

What is coinsurance?

-Coinsurance: The Plan: -Consumer pays some fixed percentage of the cost of healthcare -The insurance carrier picks up the remaining portion -Effectively lowers the out-of-pocket price of healthcare

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

-Conventional theory (standard gamble model): --Assumes people purchase health insurance to avoid or transfer risk --Insurance services as a pooling arrangement ---Reduced risk associated with aggregated losses -Nyman model --Assumes people purchase health insurance to have access to healthcare --Pooling arrangement ---Ailing individuals to receive a transfer of income from those who remain healthy

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

How is it related to the demand curve?

-Greater the elasticity, flatter the demand curve -Smaller the elasticity, steeper the demand curve

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.

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

How is it related to revenue & expenditure?

-Increase in price for elastic demand: TR decreases -Increase in price for inelastic demand : TR increases -Total expenditures on hospital and physician services increase with a greater out-of-pocket price for inelastic goods/services (i.e. primary care)

Copayment

-fixed amount paid by the consumer -Independent of the market price or actual costs of medical care

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

-Inelastic with respect to price --Because the consumer typically pays a small portion of the cost of medical services --Because medical services are sometimes of an urgent nature --Medical services are necessities -More elastic --For elective medical care (luxury) --If more substitutes available

Why the demand for medical care is 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 -Inability to accurately measure medical care

are the unintended outcomes of price ceiling?

-Longer waiting lines -Non-price rationing (i.e. biases. corruption) -Reductions in the quality of care

What is an externality? Negative vs. positive

-Negative externalities add a social cost and positive externalities add a social benefit A market transaction affecting bystanders - parties other than the buyers and sellers Un-priced by-product of production or consumption (e.g. either a partial cost or partial benefit is not accounted for) Buyers and sellers do not fully internalize all the costs and benefits of the transaction The product is usually under- or overproduced from a societal perspective

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

-Number of buyers -Income -Price of related goods -Tastes -Expectations -Time costs

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

-Number of sellers -Technology advancement -Taxes and Subsidies -Expectations of producers -Resource prices -Prices of other goods the firms could produce

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

-Objectives include: --Promotes competition among the firms within an industry --Prohibits firms from engaging in certain types of market practices that may inhibit efficiency Violations of antitrust laws include: -price fixing --Business rivals in an industry abide to a collusive agreement --Similar to monopoly: maximization of joint profits Boycott -Agreement among competitors not to deal with a supplier or a customer -Market Allocation -Competitors agree not to compete with one another in specific market areas: monopoly outcome -Examples of antitrust laws include: -Sherman Antitrust Act, 1980 -Clayton Act of 1914 -Federal Trade Commission Act of 1914 -Cellar-Kefauver Amendment of 1950

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

-Perfectly elastic: horizontal demand curve -Elastic: very flat demand curve -Unit elastic: 1 for 1 demand curve -Inelastic: very steep demand curve -Perfectly inelastic: vertical demand curve

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 decrease moral hazard cost and decrease the risk exposure of the consumer -With consumers paying a higher percentage of medical bills than before, they will be contributing more to their insurance company than they are taking from it

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?

-Risk averse people --More insurance coverage --Concave utility curve -Risk neutral people --Indifferent between purchasing or not purchasing --Slope of utility curve is constant -Risk lover --No insurance --Convex utility curve

What are the economic reasons for government intervention?

-Special Interest Group Theory: --Special interest groups can impact: ---Amounts and types of legislation determined by the forces of supply and demand ---Overall fiscal package / political exchanges ---Associated inefficiencies Public Interest Theory: -promotion of the general interests of society as a whole -restoration efficiency & promote equity -enhanced efficiency and equity through laws and regulations

How do we interpret the demand price elasticity?

-The more elastic a good, the more sensitive to price consumers are to price change -The more inelastic a good, the more insensitive consumers are to price change

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

-When the whole demand changes, we call it a shift of the demand curve -When quantity demanded changes, it is only a movement along the demand curve

Deductible

-a fixed amount of healthcare costs per calendar year paid by a consumer before coverage begins -Insurance pays all or some portion of the remaining medical bills after deductible is met

How do we define equilibrium?

A certain price at which quantity demanded equals quantity supplied

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

Because people desire not medical care itself, but rather medical care leads to better health

How can government policy improve market outcomes?

Government policy can work to eliminate or internalize negative externalities via taxation and can further grow upon positive externalities via subsidies

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?

HMO: -Combines the financing and delivery of care -The assigned or chosen primary care provider acts as a gatekeeper-refers the patient for specialty and inpatient care -Lower premiums, small or no deductible PPO: -A third-party payer provides financial incentives to enrollees to acquire health care from a predetermined network of physicians and hospitals. -Biggest choice of doctors CDHP: -Consumer-directed health care -High deductible

What does own price elasticity of demand measure?

How sensitive the consumers are to changes in price of a particular good

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

If the good/service provides a negative externality (i.e. cigarettes), then the government will place a corrective tax on that good/service If the good/service provides a positive externality (i.e. hybrid cars), then the government will subsidize that good/service

When a complement of a given good becomes more expensive, what happens to the demand for another complementary good? (If bagels become more expensive, what happens to the demand for cream cheese? Or if eye doctor visits become more expensive, what happens to the demand for glasses?)

In this case, as the complement of a given good becomes more expensive (price increases), the demand for another complementary good decreases

When a substitute of a given good becomes more expensive, what happens to the demand for the given good? (If Pepsi become more expensive, what happens to the demand for Coke? Or if minor eye surgeries at the hospital become more expensive, what happens for the demand for the same surgeries at the private doctor offices?)

In this case, as the substitute of a given good becomes more expensive (price increases), the demand for another substitutable good increases

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; results in shortage Price floor: minimum price that can be charged; results in surplus

What causes a movement along the supply curve?

Price change of the good itself

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 (1.45% currently) Regressive: net taxes as a fraction of income fall with income: sales tax (7.25% in California currently

What does the "law of demand" imply?

The claim that the quantity demanded of a good falls when the price of a good rises, other things being equal

When do we have a surplus? (Is the price too low or too high compared to the equilibrium price?)

The price is too high compared to the equilibrium price

When do we have a shortage? (Is the price too low or too high compared to the equilibrium price?)

The price is too low compared to the equilibrium price

Moral Hazard

situation in which consumers alter their behavior when provided with health insurance