Student Number:

YORK UNIVERSITY
FACULTY OF LIBERAL ARTS AND PROFESSIONAL STUDIES DEPARTMENT OF ECONOMICS
AP/ECON 3510.03 SECTION A
HEALTH ECONOMICS
TEST #2 SOLUTIONS

INSTRUCTOR:
Gordana Colby

th

Monday, June 13 , 2016

50 MINUTES (3:00PM 3:50PM)
LOCATION: VH B

NAME: _________________________________ _________________________________

LAST NAME
FIRST NAME
STUDENT NUMBER:

_______________________________________

SIGNATURE:

_______________________________________

INSTRUCTIONS:

Make sure to print your NAME, STUDENT NUMBER and SIGN the sheet above. Write your
student number at the top right of each page.
Please use a pen (not a pencil) otherwise grade reappraisals will not be considered.
Basic scientific calculators are allowed, although you should not need one.
You have 50 minutes to answer all questions (a total of 43 marks). Questions will be either
multiple choice, true/false/why or short answer format.
For multiple choice answers, no work needs to be shown. The full marks will be granted if the
best answer is circled and zero otherwise.
For true/false/why questions, grading will emphasize your explanation.
For true/false/why and short answer questions make sure to show all your work, part marks will
be granted. It is a good idea to state the meaning of any technical terms you use in your answer.
Be concise and clear, the allotted space is adequate to provide a good answer. In all cases your
answers should emphasize and discuss the questions from an economic perspective using
concepts discussed in the lectures and notes. Your answers should reflect what a thoughtful
health economist would say about these issues.
Although not required, feel free to draw diagrams to help answer questions (in which case be
clear what you are graphing)

Student Number:

1.

[2 Marks] All BUT ____ are characteristics of health care that are central to economic analysis
A.
B.
C.
D.

derived demand
public externalities
uncertainty
public insurance

2. [2 Marks] A need can be shown for many goods such as housing, food and health care. Health care
is different from other goods that we need because
A.
B.
C.
D.

health care produces externalities

there are limited substitutes for health care
health care is a derived demand
it is easy to identify the need for health care

3. [2 Marks] James was feeling ill but did not visit his physician because he was pretty sure his
physician would prescribe a medication. This suggests that
A.
B.
C.
D.

over the counter drugs and prescription drugs are substitutes

James is worried about supplier induced demand
physician visits and prescription drugs are complements
physician visits and over the counter drugs are substitutes

4. [2 Marks] Evidence indicates that the income elasticity of demand for health care is
A.
B.
C.
D.

inelastic at the individual level and more elastic at the aggregate level
inelastic at the individual and inelastic at the aggregate levels
elastic at the individual level and more elastic at the aggregate level
elastic at the individual level and less elastic at the aggregate level

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5. [2 Marks] John and Jane's boss offers a reward for their hard work. He offers to give them each
$10.00 or flip a coin and give the winner $20.00. John wants to take the $10.00 but Jane wants the
chance to win the $20.00.
A.
B.
C.
D.

The expected payout is $10.00 for both John and Jane.

The expected payout is $20.00 for both John and Jane.
The expected payout is $10.00 for John and $20.00 for Jane.
The expected payout is Zero for John and $20.00 for Jane.

6. [2 Marks] Jim's neighbours commented that ever since Jim bought theft insurance he never locks his
doors anymore. This is an example of
A.
B.
C.
D.

ex post moral hazard

ex ante moral hazard
asymmetry of information
adverse selection

7. [2 Marks] The Gatekeeper model of access includes the ideas that

A.
B.
C.
D.

a physician must have control over health care utilization

a primary care provider should be the only one recommending care
a primary care provider should regulate access to the health care system
a patient should be able to access care directly reducing administrative costs

8. [2 Marks] The advertisement claimed Mrs. Smith could get her wheelchair for free because medicare
paid for some and her private insurance would pay for some. This is an example of
A.
B.
C.
D.

double dipping
joint public and private financing
complementary public and private financing
alternate public and private financing

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9. [6 Marks] If a doctor is a perfect agent for her patients, she will always provide care that is expected
to improve a patient's health.
True

False

Why?

A perfect agent does whatever the patient would prefer if the patient had the same information as the
provider. Optimal health care consumption depends both on the effectiveness of health care and patient
preferences for health. A provider that always delivers care that is effective (i.e., expected to improve
health) ignores patient preferences for health, and therefore would not be a perfect agent.

10. [6 Marks] When physicians create supplier-induced demand (S-ID) for their services this implies that
their health care provision is inefficient.
True

False

Why?

Suppliers can induce demand for many reasons, some are not inefficient. For example, a physician
recommending a treatment based on their own medical knowledge and the patients preferences is
inducing demand that is efficient (the patient would not demand it without the doctors suggestion).
However, a type of induced demand that is not efficient is when demand is induced by the doctor and the
doctor does so by mistake, because they do not know effective medical treatments or because they do
not truly know the patients preferences (so the physician is not a perfect agent unintentionally).A third
type of supplier induced demand often called self-interested supplier induced demand is consistent with
income maximization of the doctor and so is also inefficient.
Note: this is a very straightforward question that is closely related to material discussed in class. You
could also answer this question by approaching the definition of inefficient, meaning MB is not equal to
MC (or a similar argument). MB=MC when a doctor is a perfect agent and is inducing demand (efficient in
this case) but MC is not equal to MB when a doctor is inducing demand in the second and third scenarios
above (not a perfect agent) so in these cases he or she is inefficient.

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11. [6 marks] Unlike most other countries, in Germany the public portion of health care is regressively
financed and the private portion is progressively financed due to its social insurance system with
substitutive parallel private insurance only available to high income earners.
True False Why?
True. Everything stated here is true. First we must realize that a regressive financial system means that
people with less income pay relatively or proportionally more and a progressive financial system means
that people with more income pay relatively more. Germany uses a social insurance system that has a
substitutive private insurance component that allows only high income earners to opt out totally of the
public system and income above a threshold is exempt from the public social insurance fee/tax . This
means that the public system is mostly paid by low income earners making the public system regressive
(you could also say the public component has a Kakwani index that is negative) and the private portion is
progressive since it is only paid by high income earners and low income earners pay zero (the private
components Kakwani index is positive). This is the opposite of the U.S. (and other private health
systems) since the public system there is funded by progressive income taxation and the private system
is a voluntary pay insurance system in which the insurance premium depends on you risk status, not your
income (and the Kakwani indexes are the opposite of the German case).

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12. [9 marks] Discuss the main characteristics of health care that differ from standard goods in
microeconomic theory. Briefly explain how each characteristic helps to make health care different as
an economic commodity. (Feel free to use point form for answering this question, as you need not go
into too much detail describing the role of each characteristic a couple of points for each
characteristic should be sufficient.)
The 5 main characteristics of HC (health care) that differ from standard microeconomic goods are:
1. The Demand for HC is a Derived Demand.
People demand HC not because they enjoy consuming health care (needles hurt), but because
it improves health. This is the indirect effect of HC on utility through its impact on health.
According to the Grossman model of derived demand, health is produced and consumed at the
same time. Therefore all 3 types of efficiency apply to HC (technical, cost-effective and
allocative). For standard consumption goods the only relevant efficiency concept is allocative
efficiency.
Derived demand (and the production relationship between HC and health) helps distinguish
needs from wants. HC is considered a need.
2. HC generates important externalities that cause market failure.
Physical externalities originate in physical health effects associated with communicable
diseases.
Caring externalities originate in concern over others access to needed HC.
3. Informational Asymmetries.
Optimal care requires 2 kinds of information:
o Information regarding the expected impact that a HC service will have on a persons
health (physician knows more about this one because of specialized medical training).
o Information on the value to the individual of that health improvement (patient knows
more about this one).
One policy response is physician agency, however physicians can never be perfect agents.
The implications of this for economic analysis is that demand and supply are no longer
independent and consumer surplus no longer has the usual interpretation.
4. Uncertainty of Need/Effectiveness.
Onset of illness is innately unpredictable one cannot plan ones HC consumption like other
purchases. A market for HC insurance will be desirable.
There is also uncertainty surrounding the effectiveness of HC even the best medical care will
sometimes not work.
5. Vulnerability of Consumers.
People must often make HC decisions in highly stressful contexts in which they feel vulnerable
as persons and their ability to function is compromised.
This has implications regarding: the ability of people to make rational choices; the ethical,
equitable allocation of HC; the mechanisms by which society governs access to and the
allocation of HC resources.
o While many goods and services share at least one of these characteristics with HC, it is the
presence of all these characteristics that makes HC unique (with the exception of maybe legal
services).