A. True/False Explain.
Indicate whether each of the following statements is true or false and then explain
why you think this. Include in your explanation any pertinent institutional details and
economic reasoning (including appropriate graphs and equations). Please provide
concise, clear answers with minimal irrelevant detail. Explanation is required.
1. In the Grossman model, optimal health status declines with age.
2. Suppose you are interested in estimating the elasticity of demand for medical
care. A bad way to do this would be to compare people who are healthy to
people who are sick, and estimate how prices affect the amount of additional
care that sick people choose to purchase.
3. According to the model of rational addiction, if the tax on an addictive good
increases, it could lead to an increase the number of non-addicted consumers
who try the addictive good.
4. In Figure 1 below, an individual with high levels of education has marginal
efficiency of investment given by MEL The marginal efficiency of investment
for an individual with low levels of education is given by MEI.
5. In real life, investments in health can generate long-lasting benefits. but
the Grossman model neglects this aspect of health.
B. Analytical Problems: Please show all calculations for full credit.
6. Suppose you are collecting data from a country like Japan where the
government sets the price of health care. Each prefecture in Japan has a different set
of prices. Data from 1999 are displayed in the following table
Table 2.12: Outpatient utilization
in Tokyo and Hokkaido, 1999.
a what is the arc price elasticity of demand for health care in Japan based on these
b- Suppose that incomes are generally much higher in Tokyo than in Hokkaido. Is the
Correct demand function more clastic or more inclastic than your answer to the
previous question? Justify your anSwer.
C. Using your estimated elasticity from part a, what would the demand for health
care be if the price in Tokyo were raised to 30 Yen per visit?
d. What would the demand in Hokkaido be IF the price were lowered to 5 Yen per
7. Washington State decides to introduce a tax on the sale of marijuana-
Assume the clasticity of demand is -0.5. and that supply is perfectly clastic.
If the tax increases the price of marijuana by 60%, what will
happen to the amount that is sold?
SuppoSe marijuana is addictive, and that conSumers who choose to
buy itare rational addicts Explain what the theory of rational
addition predicts will happen to the quantity Sold today if the tax
increase begins next year. (Note the theory of rational addiction
says nothing about Stockpiling goods to avoid paying taxes, so that
is not the answer Iam looking for.)
(Extra Credit QueStion) suppose there isa legal market with
perfectly clastic supply that pays the tax, and a secondary black
market that evades the tax. The clasticity of supply in the black
market is 1 (the number doesn' matter, just assume that it's
neither perfectly clastic nor perfectly inclastic). and assumes that
after the taxit's cheaper to buy from the black market at low
market quantities Draw an example of what the market supply
curve would looklike- (Hint the market supply curve repreSents
the lowest price at which you could buy a given quantity of a good.)
Now suppose the state is short on money So they raise the axrate.
Show using a supply demand diagram what will happen to total tax
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A: True or False with explanations
This is because, as individuals become older, they tend to get sick often and hence their health status also declines with age.
Since medical care is demanded by both healthy people and sick people this comparison between the two categories would give an more efficient estimate of the demand elasticity for medical care.
3. False: When the price of a commodity increases, the number of consumers for that product would decrease (and not increase) and this is particularly for the non-addictive consumers who might try the good.
4. False: A higher level of education would always result in higher level...