Chapter 5 Review Questions

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1.With an increase in demand for medical services, how will different supply elasticities affect total medical expenditures?

An increase in demand will affect prices and quantity of services differently because it depends on the elasticity of supply. When supply is relatively elastic, increase in demand will be accompanied by a price increase, but it would be much less if supply were inelastic. Under elastic supply conditions, a much greater increase in services provided will occur. When supply is relatively inelastic, demand will result in larger price increases and small output increases. (Answer found on Pg. 110)

2.Assume that the price of a specific input (e.g., registered nurses) was subsidized. Trace the effect of such a policy in all the medical markets and evaluate this policy in terms of its effect on the goal of increasing the level of the population’s health. Second, evaluate this policy in terms of economic efficiency. Finally, evaluate this policy in terms of who benefits and who bears the cost.

When the supply subsidy has reduced the price of one of their inputs, such as registered nurses, the effect on the institutional sector of the supply subsidy will be a shift to the right in the institution’s supply curve. This is because they can produce the same quantity of services at a lower price or a greater quantity of services at the same price. Some institutions use more of the subsidized input more than others; therefore, the supply subsidy’s affect would be different for each type of institution. The overall affect on the final price and quantity of medical services depends on how much of an increase in the input occurs as a result of that supply subsidy, how much of a decrease in the price of an input occurs, how much of that subsidized input is used in the production of medical care, and other factors. (Answer found on Pg. 111-112)

3.Trace through each of the medical care markets the...
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