Health Economics

Problem Set (Production of Health)

Econ 3108

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For calculation and graphical problems, explain your answer, show any calculations, and fully label graphs.


1)  Consult the table showing the elasticity of health with respect to health care spending (the percent increase in health (life expectancy) from a 1% increase in health care spending) below:


  1. Briefly, explain patterns in the figure for children, young adults, middle age, and the elderly. Refer to the types of diseases afflicting the different age groups and available treatments.
  2. If the entire population doubles medical care spending, what happens to the elasticity figures? (Up, down, unchanged, ambiguous). Explain. Hint: think about the concept of diminishing returns to medical care.
  3. How might the figure change if we counted spending on public safety awareness initiatives, such as drunk driving, seat belts, child safety seats as part of “medical spending”?
  4. Suppose as a new public policy, the government expanded medical care entitlement programs to middle aged people, effectively giving them much more generous health insurance. According to the figure, is this an effective age group to target if the goal is to increase nationwide life expectancy? Explain.
  5. How would this policy affect their usage of medical care? Consider the types of medical interventions relevant for the middle aged population.
  6. Holding the state of medical technology fixed, how would the policy cause the elasticity figure to change for middle age people?





2) Consider if technological change is worth it to extend the life of certain populations, based on a cost-effectiveness (cost-benefit) ratio. In other words, will a medical technology that costs $1,000,000,000 be worth it if it only extends life, for the elderly, by 2 years (the value of a statistical life is anywhere from $50,000 to $129,000 per year of life, for extending life by a quality year, i.e., a year in good health).


  1. How are benefits measured for medical technologies that impact individuals at a younger age (i.e., treating low birth weight) versus at an older age (i.e., treating heart attacks)?
  2. For heart attacks, what technological changes occurred between 1984 and 1998?
  3. Briefly explain what it means for a treatment to be expanded along the extensive margin and intensive margin. Give an example that represents a change on the extensive margin. An example on the intensive margin.
  4. Suppose researchers discover a gene that predicts a relatively high incidence of breast cancer in young women (younger than 30), a group that previously did not get screened, but the cancer is known to develop slowly in young women. How should screening protocols be set along the extensive and intensive margin for women with the gene in the younger than 30 age range?


Note: There is a “breast cancer” gene called BRCA that predicts a very high risk of developing breast cancer, particularly in young women (and men for that matter).  A genetic test is available, but it is quite expensive.  This raises issues about whether people should get the test, whether health insurers should pay for it, and whether health/life insurers should have access to the test results for the purposes of determining premiums.