Reference no: EM133286270

Managerial Health Economics Assignment -

Q1. The federal government is considering allocating $10 billion to local health departments this year and then an additional $5 billion dollars for the next two years (that is, spending is $10 billion in t=0, $5 billion in t=1, and then another $5 billion in t=2). This spending will have no effect until period 2, at which point it will save 5,000 lives.

a. Suppose the government assumes a value of a statistical life of 2 million and a discount rate of 0.05. What is the present value of the federal spending? Should the government allocate the money to the health departments?

b. Suppose the government assumes a value of a statistical life of 5 million and a discount rate of0.05. What is the present value of the federal spending? Should the government allocate the money to the health departments?

c. Suppose the government assumes a value of a statistical life of 5 million and a discount rate of0.10. What is the present value of the federal spending? Should the government allocate the money to the health departments?

Q2. An economist is seeking to estimate the value of a statistical life to inform government policies.

a. Consider the two following cases, and discuss what the economist's estimate of the value of a statistical life would be:

i. A miner will work for a salary of $55,000 if there is a 0.01 percent chance of dying in the mine and $100,000 if there is a 0.10 percent chance of dying in the mine. What value of a statistical life does the economist estimate?

ii. Suppose that renting a life jacket decreases the chance that someone dies on a boating outing from 0.01 percent to zero. Jack will rent the life jacket only if the life jacket costs$7 or less. What would the economist estimate for Jack's value of a statistical life?

b. The estimated value of a statistical life in part ii is low. Why might this estimate be wrong?

Q3. The current approach to treating a certain disease cost $10 million and saves 5 lives.

a. Suppose that lawmakers are considering implementing a new policy that will cost $25 million total and save a total of 10 lives. Calculate the cost-effectiveness analysis ratio for the new policy.

b. Suppose that instead of the policy in part b, lawmakers are considering implementing a policy that will cost $50 million total and save a total of 13 lives. Calculate the cost-effectiveness analysis ratio for the new policy.

c. Explain how the cost effectiveness analysis could be helpful for the policymakers. Also, explain why the cost-effectiveness analysis does not tell policymakers whether or not they should implement a new policy.

Q4. Consider the market for cigarettes, where the marginal cost of producing a pack of cigarettes is $8. Assume the market for cigarettes is perfectly competitive (and recall that in a perfectly competitive market price equals marginal cost). Also assume that each pack of cigarettes incurs a cost to the smoker of $6 in the form of increased cancer risk and incurs a cost of $5 to the smoker's neighbors in the form of secondhand smoke.

a. Suppose you have one consumer, Edward, who values each pack of cigarettes at $10. Given the information above, what are Edward's private benefits and costs of smoking a pack? Is it privately efficient for him to smoke?

b. What are the public benefits and public costs of Edward's smoking? Is it socially efficient for Edward to smoke?

c. Suppose that, due to the introduction of a hyper-effective tobacco fertilizer, the cost of producing a pack of cigarettes plummets to $1. Now is it privately efficient for Edward to buy a pack of cigarettes?

d. Is it now socially efficient for Edward to buy a pack of cigarettes?

Q5. Consider the market for vaccines where individuals only take into consideration their own private marginal benefit but not any external benefits from the vaccine (i.e., the impact of them being vaccinated on other people's likelihood of becoming infected). Also assume that the marginal cost of producing the vaccine is constant/flat. Is there a market failure in this vaccine market? If so, explain why and explain whether the equilibrium quantity of vaccines consumed is less than or greater than the optimal. What if individuals do take into consideration external benefits from vaccinations. Is there a market failure here? Why or why not?