Economics 236 - Health Economics and Policy Problem Set 2-

Give clear, well-written answers to the questions that follow below. Use full sentences, carefully thought out economic arguments, and well-labeled graphs were appropriate. Be concise and to the point, but do discuss all important and relevant information.

1) Agree or disagree; DEFEND your answer. (Use 1-3 paragraphs to answer each one of these questions.)

a) Going to medical school and specializing in a surgical residency is extremely profitable, and the best evidence to support that is the high annual incomes earned by surgeons.

b) In markets for physician services, prices differ across providers in a single community only because of quality differences. (Diagram - Hint: Which market structure fits the physician firm market best?)

2) Consider three cities with the following populations:

City A 98,000 people
City B 49,000 people
City C 5,000 people

Presume that each city has the same average level of income, family size, age distribution, insurance coverage etc.

a) If this society (composed of Cities A, B, and C) has 15 doctors, where will they locate? Why? (Be specific: how many doctors will live in each of these cities?)

b) If the medical population doubles to 30 doctors, where will they locate?

3) Two concepts that have some similarity in the literature on health economics are "variations in medical care" and "demand inducement." Indeed, some people have suggested that demand inducement "explains" variations in medical care.

a) In a few sentences, what key feature about "demand inducement" distinguishes it from "variations in treatment rates".

b) Can demand inducement account for or "explain" geographic variations in medical practice use? How could we ever test as health economists if the two concepts are truly different? (This last question is a difficult and a bit hypothetical question. Treat it as a bonus question and take some risk, have some fun with it. Don't worry if you get it wrong!)