Question

1. The politician wants to allocate spending so that hospitals may purchase new and expensive cancer detection machines. At the dedication he says ‘spending this money will be worth it if this policy saves even one life”. Having taken an economics class, you roll your eyes at the political gibberish. Explain why, from the economic perspective, the politician is spouting gibberish.

I was told I need to provide an answer that focusses more on economic logic and perspective and discusses marginal costs and benefits more.

2. Given the following terms affecting the supply and demand for good ‘x’: income, resource costs, wages, technology, expected income, P_s, P_c, P_x, taxes, number of sellers, productivity, tastes and preferences:

a)    Write out the Demand Relationship. Note the slope and shift terms. Identify (write out) the Demand Curve from the Relationship.

b)    Write out the Supply Relationship. Note the slope and shift terms. Identify (write out) the Supply Curve from the Relationship.

Answer 1

1. Ans. As per the incremental principle, with every new resource employed, there would be an increase in the cost as well as the revenue. The increase in cost with every new unit of resource is marginal cost whereas the increase in revenue is marginal revenue. A decision is said to be justifiable if the Marginal Revenue is more than the Marginal Cost. The profit maximization approach is where the marginal revenue equals the marginal cost.

Thus when it is said that ' spending this money will be worth it if this policy saves even one life ' is not making any sense. This is because when the new machine is purchased, it would lead to an additional cost, which is the marginal cost. Moreover, it would also lead to additional benefit in the form of early detection and saving the life, which is the marginal benefit. The purchase of machine is justifiable only when the marginal benefit is more than the marginal cost. This would interpret that purchasing a machine would be a right decision only when the number of lives saved is more than the cost incurred in purchasing the machine.