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Econ 5860: Health Economics

Fall 2025

Problem Set 1

Due Date: September 15th, 2025 by the beginning of class

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. Suppose you are interested in estimating the elasticity of demand for medical care. A good way to do this would be to compare the quantity demanded by people with insurance to the quantity demanded by people who chose not to buy insurance, and estimate how quantity responds to the reduction in prices caused by insurance coverage. [5 points]

2. The figure below depicts the utility function for an addictive good (from our discussion of the model of rational addiction.) One feature of utility for addictive goods is `withdrawal', which is captured in the figure in the feature that line AD is below line BC.  [5 points]

B. Analytical Problems: Please show all calculations for full credit.

3. Health Demand: Aggregate demand for hospital visits at Ohio Wexner is given by Q = 1,000,000 - 800P. The supply of hospital visits is perfectly elastic, with a market price per visit of $1,000. [10 points total]

a) [1 point] How many hospital visits are purchased?

b) [2 points] What is the total amount of money spent on hospital visits?

c) [3 points] A new universal health insurance policy provides insurance to everyone, which pays 80% of all medical costs. After this policy is enacted, how much does the total amount of money spent on hospital visits change?

(d) [4 points] What is the deadweight loss from moral hazard caused by this policy?

4. 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. [12 points]

a. What is the arc price elasticity of demand for health care in Japan based on these data?

b. Now, suppose that incomes are generally much higher in Tokyo than in Hokkaido. This would mean that Tokyo and Hokkaido have different demand functions. Is the correct demand function more elastic or more inelastic 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? Give a numerical answer and use the arc elasticity formula.

d. Using your estimated elasticity from part a, what would the demand in Hokkaido be if the price were lowered to 5 Yen per visit? Give a numerical answer.