Question

You are the Finance Director of a regional health authority. Currently the authority caters for about 100,000 residents, with an annual budget of $10 million. The region is experiencing rapid population growth, and you expect to have to look after 110,000 residents next year. You have just been told that your budget will be $10.5 million. Since you used to have $100 per resident, but now will have to work with $95.45 per resident, can you say with justification that the government is deliberately allowing the standards of health care to fall in the region? (30%)

(Hint: do you know what the “marginal cost” of servicing each of the 10,000 new residents is?)

Answer 1

Number of residents: 100000

annual budget: $10000000

amount spent per person: 10000000/100000= $100

population next year: 110000

inorder to maintain same health standards for everyone, govt requires: $100*110000= $11000000

but govt's budget is only $10500000

so govt is short of $500000 in order to maintain same health standards.

amount spent per person: 10500000/110000=$95.45

the marginal cost of serving one new resident is $100

and marginal cost of serving 10000 is $100*10000= $1000000, one million

The increase in population requires the govt to increase its amount by $5lakhs ie half a million, inorder to maintain health standard, so the government is deliberately allowing the health standards to fall by: (100-95.45)/100= 4.5%.