Instructions: (1) Type your answers by using a readily available program (such as word document etc.). If possible, use the same program to draw your graphs. If you draw graphs by hand, please make sure that I would not need your help to decipher it. (2) Do not forget to identify and mark the critical intersection points in your graphs. Do not show all your answers in one graph. If necessary re-draw the graph to answer a specific question. (3) When you solve problems show your work! That is, be clear about each step you are taking in solving the problems and each formula you are using. Do not assume that I will understand what you are doing by just looking at the final result. I am interested in your reasoning than the right answer! Do not skip the intermediate steps that demonstrate your reasoning. If necessary explain in your own words how you solve the problem and why you solve the way you solve it. (4) Do not write down everything you know and/or remember! Write down only the relevant information. If you do so, you would see that answering the following questions would not take much time & space.

QUESTIONS:

Suppose we have two families: the wealthy Scotches and the poor Sixpacks. Each family has a newborn baby and consistent with real-world statistical evidence, Baby Scotch is perfectly healthy whereas Baby Sixpack is somewhat sickly. In addition, suppose that the following are the demand or "willingness-to-pay" functions of each family for physician's office visit with no health (care) insurance.[1]

LaTeX: p=120-12q_{sixpacks} p = 120 - 12 q s i x p a c k s

LaTeX: p=240-40q_{scotches} p = 240 - 40 q s c o t c h e s

a) By using the functions above draw demand or "willingness-to-pay" curves for each family. Based on what you learned about demand or "willingness-to-pay" for health care services, why do you think that the two families' demand curves for physician visits do not coincide? Why do the Sixpacks seem to value visits less than do the Scotches at visit rates up to 4.3 and why might they value visits more than do the Scotches at visit rates above 4.3?

b) If these two families are allowed to buy physician services in a freely competitive market, at a price of, say $80, then calculate the free-market allocation of physician visits to the two babies.

Accept for a moment the normative position adopted by many practicing economists and by the like-minded politicians that the "marginal-value" (demand) curves of individual consumers or households also signal the marginal social value of commodities. Also assume that the free-market price of $80 per visit reflects the social marginal cost of producing visits, including the opportunity cost of physician's time. Then, would the free-market allocation of visits you have identified above be "economically efficient" as economists defined the term? Explain why (not).

c) Suppose, now that government rations physician services according to "need" rather than "ability to pay." The "need" criterion is described according to the social determinants of health approach that gives the priority to the Sixpack family since they are poor and have a sickly baby. So, the new allocation based on government rationing allows the Sixpack family receives 4 visits while the Scotch family gets only 2 visits. In comparison with the free-market allocation, would such allocation be efficient as economists defined the term? Explain and demonstrate your reasoning with welfare gain/loss calculation between the two cases.

d) Could the rationing of physician visits by government be avoided if the government refrained from intervening in the market for physician visits and instead let free market forces determine their allocation? Why (not)? (Hint: This is not a silly question if you think of the meaning of the term rationing and different ways of rationing).

e) Now suppose that instead of using rationing option, government wants to use a regulation policy measure: price ceiling. Accordingly, government sets the price for physician services at $50 per visit. Following the arguments in your textbook (Santerre and Neun, 2010), decide whether this policy would have a welfare-reducing or enhancing effect in comparison with the initial free-market allocation. Explain.