Question

Analytical Questions

1. Consumer health care spending is sensitive to cash flow fluctuations and it has historically been affected by dynamics in income and demographics. Discuss how income and demographics may have contributed to healthcare cost and explain one additional factor that you believe may have played a role in the increase in medical spending/cost.

2. Assume a nation called Rutania is producing only two goods: Medical equipment and Natural Gas using all its resources and technology. When Rutania spends all its resources on Medical equipment, it can produce 2 million units of medical equipment. It can produce $4 trillion worth of Natural gas if it spends all its resources in the production of Natural gas. Draw a bowed-outward PPF for the nation Rutania and show the impact of a significant improvement in the technological capabilities of Rutania in the production of Medical equipment and Natural gas

3. P and Q are the Price and Quantity demanded for Chocolates in NewTown. The interaction of demand and supply determined the equilibrium price and quantity to be P* and Q*. The elasticity of demand for Chocolate in NewTown is 1.88. A recent research publication by FDA showed that eating more chocolates will exacerbate Gastroesophageal reflux diseases (GERD) and the information became common knowledge. Show in a graph the effect of the research finding on the equilibrium price and quantity. Given the effect on price (increase/decrease), what will be the effect on total healthcare spending?

Answer 1

Answer 1.

If we look from macroeconomic perspective i.e from the point of view of the entire nation , the richer a nation becomes it can spend more money on healthcare needs of its people. Therefore with improved National income or GDP, consumer spending on healthcare increases. Further demographics have an important role in determining healthcare spending. If there are more older populations i.e age >60 years or greater infant population i.e. age <2 years, more will be spent on healthcare. If we look at data for US economy, healthcare costs have risen significantly as compared to other European nations owing to aging populations.

Another vital factor that affects healthcare spending is due to pollution and environmental degradation. With falling air quality indexes due to vehicle pollution or emergence of new biological diseases, or global warming, healthcare demands have risen and so are costs associated with them.

Answer 2.

The below diagram shows the resource spread between production of medical equipments and Natural gas for the country Rutania. Here the x axis shows Quantity of medical equipments produced and y axis shows Quantity of Natural gas produced. Find the PPF₁ curve. With improved technology PPF₁ moves outward to PPF₂, so that more of both the goods can be produced.

Answer 3.

As per the given information the price elasticity of chocolates in Newtown is 1.88. Since it is greater than 1 , it means chocolates are sensitive to price. For any small change in price, demand for chocolates changes by greater proportion.  

However after research published by FDA that shows intake of chocolates can increase GERD, demand for chocolates will decrease as people will prefer buying substitutes like yogurt which are more healthy.

Note: Here we assume consumers are making rational choices by cutting intake of chocolates for health concerns.

Also we assume that consumers believe in reports released by FDA. As shown in graph the demand curve shifts leftwards for all prices.

In the diagram the immediate effect of demand curve is shown - DD₁ curve shifts to DD₂ . Overtime this change in demand will get reflected in price elasticity of chocolates as well.

Also we can find that in order to sell the same quantity, suppliers have to cut prices. So prices will decrease.

However the exact effect of reduced prices of chocolates on healthcare spending cannot be determined from this alone. If people of Newtown increase their consumption of chocolates due to price decrease , then they will have to spend more on curative healthcare , so they will spend more on healthcare needs. However if they decrease or cut down the consumption of chocolates following the research publication report, then it is a preventive measures so there will not be any significant change on healthcare spending.