Ohio Econ 5860 – Health Economics Problem Set 1
Subject: Economics   / General Economics
Question
Econ 5860: Health Economics
Ohio State University
Spring 2017
Problem Set 1
Due Date: Feb 1, 2017 by the beginning of class
Please submit assignments on Carmen.osu.edu 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 MEI. 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: a. What is the arc price elasticity of demand for health care in Japan based on these
data?
b. Suppose that incomes are generally much higher in Tokyo than in Hokkaido. 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?
d. What would the demand in Hokkaido be if the price were lowered to 5 Yen per
visit?
7. Washington State decides to introduce a tax on the sale of marijuana. Assume the
elasticity of demand is -0.5, and that supply is perfectly elastic.
a) If the tax increases the price of marijuana by 60%, what will happen to the amount
that is sold?
b) Suppose marijuana is addictive, and that consumers who choose to buy it are 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 I am looking for.) c) (Extra Credit Question) Suppose there is a legal market with perfectly elastic supply
that pays the tax, and a secondary black market that evades the tax. The elasticity of
supply in the black market is 1 (the number doesn’t matter, just assume that it’s
neither perfectly elastic nor perfectly inelastic), and assume that after the tax it’s
cheaper to buy from the black market at low market quantities. Draw an example of
what the market supply curve would look like. (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 tax rate. Show using a supplydemand diagram what will happen to total tax revenue.
