Health Economics Homework

Q1. Draw market demand and supply curves for prescription drugs and show the equilibrium price and quantity. From this initial equilibrium level, show how the market will be affected due to changes in the following. Illustrate by using demand-supply framework.

a. More consumers enter the market for prescription drugs

b. Consumers become better educated about the potential side-effects of drugs

c. Price of non-prescription drugs goes down (prescription and non-prescription drugs are substitutes of each other)

d. Cost of producing prescription drugs goes up due to the addition of new data requirement on drug safety

e. Income inequality in the country increased as the poor groups became poorer and the richer sections of the country became richer.

Q2. Current equilibrium price and quantity of physiotherapist visits in a geographic area are $40 and 200 visits per month. The price elasticity of demand for physiotherapist visits is about 1.8 (note that demand elasticity is mathematically negative). If the fee per visit is reduced to $20, what will be the effect on the quantity of services demanded in a month? Now assume that the State Agency of Health is concerned that the price of physiotherapy visits is too high and a new policy was adopted by setting the maximum price physiotherapists can charge to $20. Show the impact of this policy change in the market and describe how the market outcomes will change if the price control policy is effective in reducing the price charged by physiotherapist to $20 per visit.

Q3. Draw the supply and demand curves for outpatient physician services in a market area. Indicate the equilibrium price and quantity. Starting from this equilibrium, show the effect of following changes on the market for physician consultation services (discuss each separately as these are separate policy changes starting from the initial equilibrium)

a. Increase in the years of training of physicians

b. Imposing a sales tax of 10% on physician consultation fee

c. Increase in the wage of nurses (and nurse time is an input in the production process)

d. The productivity of clinic physicians increase by 15%

Q4. Draw the demand and supply curves for blood in the USA. There are no restrictions on buying and selling of blood but the market price of blood is zero. How is it possible for the market price to be zero when there is no shortage of blood in the market? Explain. Compare this market with the market for human organ "kidney". Even though it is illegal to buy and sell human organs, why do we see illegal purchase of human organs domestically or internationally? Draw the demand and supply curves of kidney to illustrate this situation.

5. Draw a set of demand and supply functions for airline travel for the month of December, a very busy time for air travel in the USA. Show the hypothetical average price of air tickets for flying 1000 miles and the number of 1,000 mile equivalent trips sold in the market during this month using the demand and supply curves drawn. What happens to the air ticket price and number of trips taken in October, one of the slowest seasons for airline industry (assuming that cost of producing airline trips remains the same)? Use the changes in demand or supply or both in the previous diagram to illustrate your response.

Now, draw a new set of demand and supply curves for okra (the vegetable grown during summer months) in the USA for the months November to March, when okra consumption is at its lowest. In the same diagram, indicate what happens to demand and supply curves during the months April-June, the highest consumption months for okra? What happens to the price of okra in April-June compared to November-March? What happens to market price of okra when the consumption of okra is highest (compared to low consumption) and what happens to the airline ticket price when the air travel is the highest (compared to low travel period)? Explain the difference in the pattern of prices observed between these two markets.