AutoSave OFF 9 06 ... w- HEALTH ECONOMICS Midterm Fall 2021 - Saved to my Mac Home Insert Draw Design Layout References Mailings Review View ? Tell me Share Comments Times New... v 10 AD EEVEEVEE AaBbCcDdE AaBbCcDd] AaBbCcDdEe AaBbCcDdEe AaBbCcDdEe AaBbCcDdEe AaBbCcDdE Paste BI Uvab X X A DAY Body Text Heading 1 List Paragraph No Spacing Normal Table Paragr... Heading 2 Styles Dictate Pane Midterm Exam FOR HEALTH ECONOMICS PLEASE READ ALL INSTRUCTIONS CAREFULLY. Points will be deducted where instructions are not followed. Draw graphs clearly, label every line and all key points. Use graphing boxes to draw your graphs to scale and label the scale (e.g. 1 box = $10). You lose points for under- labeling. You cannot lose points for over-labeling. While this is an open-book, open-notes exam it is expected that you will not copy graphs, or solutions to problems from the internet. For the essay portion of this exam, please cite resources accordingly. There are three parts: 1) Analytical Exercise (65 points for 3 questions) 2) Essay Question (15 points) 3) Multiple-choice (20 points, 2 points per question) (VIA SEPARATE QUIZ!) Calculations must be included for full credit. All graphs must be entitled Fig. 1, Fig. 2, etc., and as you write you should refer to these graphs by their titles. Advice: Draw BIG graphs to improve clarity. Part I: Analytical Exercise 1. Health Care Demand (25 points) Imagine the market for stents in the United States. Below is a table of prices and quantities. Price Quantity $ 100,000 on non con nnn Page 1 of 4 1012 words x English (United States) Focus E + 152%AutoSave OFF 9 06 ... w- HEALTH ECONOMICS Midterm Fall 2021 - Saved to my Mac Home Insert Draw Design Layout References Mailings Review View ? Tell me Share Comments Times New... v 10 AD EV EvEv AaBbCcDdE AaBbCcDd! AaBbCcDdEe AaBbCcDdEe AaBbCcDdEe AaBbCcDdEe AaBbCcDdE Normal Heading 2 Styles Dictate Paste BIUvab X X|A DAY Body Text Heading 1 List Paragraph No Spacing Table Paragr... Pane Part I: Analytical Exercise 1. Health Care Demand (25 points) Imagine the market for stents in the United States. Below is a table of prices and quantities. Price Quantity $ 100,000 80,000 500,000 60,000 1,000,000 40,000 1,500,000 $ 20,000 2,000,000 0 2,500,000 a) Please draw the demand curve and label all key points on the graph. (5 points) 2 Page 1 of 4 1012 words x English (United States) Focus E + 152%AutoSave .m if.) [E] 13 HEALTH ECONOMICS Midterm Fall 2021 Home Insert Draw Design Layout References Mailings Review View 9 Tell me '3 Share Ccmments X Times New v 10 v AA AV Aa v i . " [B ~113chan AaBdeMl AthCchEe AanCchEe AthCchEe AanCchEe AthCchE ) 1 A \\'J Paste B I U ,, ab x x2 A v I v A v BodyText Heading1 LislParagraph Nospacing Normal Table Paragv... Headingz ismes Dictate & _ 1 _ / Pane f' 1.1.1.1. 1.3.1.1.111'11111115.titttiawltwitw b) One supplier is willing to make 500,000 stents for $20,000 each, but cannot make any more no matter what. A second will make an additional 500,000 stents if the price is 40,000, but cannot make any more. Another will make 500,000 if the price is 60,000, but also cannot make more. An additional rm will make up to 1.0 million stents if the price is $80,000 per stent. The quality of the stents is equal across companies. Draw the supply curve (assume the supply curve is smooth) and label key points including the equilibrium point. What is the price and quantity at the equilibrium point? (5 points) Hint: Remember the trick in Homework 1. c) An article comes out in the New England Journal of Medicine indicating that the probability of success of stents is lower than expected. 500,000 people demanding stents exit the market (assume this is the same for all prices). The rest of the market does not change. Describe in 3-4 sentences what is happening in the market. (5 points) d) Please draw the shift on the same graph as the demand and supply curve and label it. What are the new price and quantity at the equilibrium point? (5 points) e) The prior demand curves are based on an uninsured population. However, the population is now insured with no deductible and a coinsurance rate of 25%. Use D', the demand curve in part c to determine what the cost is to the consumer? What is the quantity demanded? Draw a dotted line representing the coinsurance rate on your graph and label it COINS. (5 points) 2. Adverse Selection (20 points) a) Imagine a health insurance market with 100 people. In this market in Year 1, 40 people expect to have $0 in health expenses per year, 35 people expect to have $250 in health expenses per person per year, 12 people expect $5,000 in health expenses ' 7 neonlp Page 2 014 1012 words U3 English (United States) :1 Focus u E, _ V + 152% AutoSave OFF 9 06 ... w- HEALTH ECONOMICS Midterm Fall 2021 - Saved to my Mac Home Insert Draw Design Layout References Mailings Review View ? Tell me Share Comments Times New... v 10 AaBbCcDdE AaBbCcDdl AaBbCcDdEe AaBbCcDdEe AaBbCcDdEe AaBbCcDdEe AaBbCcDdE Paste BI Uvab X X A DAY EEEE Body Text Heading 1 List Paragraph No Spacing Normal Table Paragr... Heading 2 Styles Dictate Pane 2. Adverse Selection (20 points) Imagine a health insurance market with 100 people. In this market in Year 1, 40 people expect to have $0 in health expenses per year, 35 people expect to have $250 in health expenses per person per year, 12 people expect $5,000 in health expenses per person per year, 10 people expect $10,000 in health expenses and 2 people expect $25,000 in health expenses and 1 person expects $40,000 in health expenses over the entire year per person. Assume insurance covers 100% of medical expenses and premiums are equal to expected costs. What is the expected cost of insurance in year 1? (5 points) Note, use this premium as the Y1 premium across all parts of this problem. b) In Year 1, how many people would choose to buy insurance and how many would not choose to buy insurance based on the premium and their expected benefits? (5 points c) What would the Y2 premium be based on the individuals who choose to buy insurance? (5 points) d) Describe adverse selection in health insurance in your own words. (5 points) 2 w 3. Monopoly (20 points) You are the economist for a major pharmaceutical manufacturer. Your just received the good news that your new blockbuster cholesterol drug LOZER V has been approved by the FDA for sale in the United States. The drug is extremely effective and physicians are interested in prescribing it immediately. Your team has provided you the graph below of Page 2 of 4 1012 words x English (United States) Focus E + 152%AutoSave OFF 9 06 ... w- HEALTH ECONOMICS Midterm Fall 2021 - Saved to my Mac Home Insert Draw Design Layout References Mailings Review View ? Tell me Share Comments Times New... v 10 AD EEVEEVEE AaBbCcDdE AaBbCcDd! AaBbCcDdEe AaBbCcDdEe AaBbCcDdEe AaBbCcDdEe AaBbCcDdE Paste BI Uvab X x |A DAY Body Text Heading 1 List Paragraph No Spacing Normal Table Paragr... Heading 2 Styles Dictate Pane 3. Monopoly (20 points) You are the economist for a major pharmaceutical manufacturer. Your just received the good news that your new blockbuster cholesterol drug LOZER V has been approved by the FDA for sale in the United States. The drug is extremely effective and physicians are interested in prescribing it immediately. Your team has provided you the graph below of the market demand and the marginal cost of producing the drug. Please answer the following questions based on the graph. The graph is drawn to scale and answers should be numerical (e.g 10,000 units of the drug). The drug is currently on-patent. Monopoly Pricing of a New Drug Drug Price Marginal per Year Cost 30K 20K Demand 10K-..- Marginal Revenue 100K 1,200K Quantity Page 3 of 4 1012 words X English (United States) Focus E + 152%AumSave . n 9 HEALTH ECONOMICS Midterm Fall 2021 Home Insert Draw Design Layout References Mailings Review View Q Tell me 13 Share 3 Comments [2.1 V [XE Times New\" V 1 " AA AV A3 " A0 AaBchDdE AaBdeM] AthCchE: AaBchDdEe AthCchE: AaBchDdEe AthCchE ) Q Q; Paste B I U V ab x x2 A v I v A v Body Text Heading1 List Paragraph Ne spacing Normal Table Paragr... Heading 2 Styles Dictate g _ 1 _ g / Pane r ma lilo a) What should the production level be for the drug? In other words, how many units of the drug per year should be produced. (5 points) b) What price should you set for the drug? Explain why you selected that price. (5 points) c) What is the company's prot at this price and quantity assuming the average cost of production at your level of production is $10,000 per year of the drug? Show your work. (5 points) (1) What will the new price be when generics enter the market? What is the new quantity that will be sold? (5 points) 3 4 Part 1]: Essay (15 points) Answers must be focused and succinct points will be deducted for answers that are unfocused or unnecessarily long. (on average each question can he answered completely in 1-2 paragraphs). You should not use quotes as part of your answer, nor should any information be copied and pasted from any source verbatim. When using the Chernew article to support your point, please cite the article accordingly. Page30f4 1012 words E English (United States) :1 Focus u Fa, =__= E - V + 152% AutoSave OFF 906 ... w- HEALTH ECONOMICS Midterm Fall 2021 - Saved to my Mac Home Insert Draw Design Layout References Mailings Review View ? Tell me Share Comments Times New... v 10 A A Aa A AaBbCcDdE AaBbCcDd] AaBbCcDdEe AaBbCcDdEe AaBbCcDdEe AaBbCcDdEe AaBbCcDdE Paste BIUvab X X A DAY Body Text Heading 1 List Paragraph No Spacing Normal Table Paragr... Heading 2 Styles Dictate Pane Part II: Essay (15 points) Answers must be focused and succinct - points will be deducted for answers that are unfocused or unnecessarily long. (on average each question can be answered completely in 1-2 paragraphs). You should not use quotes as part of your answer, nor should any information be copied and pasted from any source verbatim. When using the Chernew article to support your point, please cite the article accordingly. II. Read "The Role of market Forces in U.S. Health Care" by Mike Chernew. a) Describe two issues causing market forces not to work well for health care (6 points, 3 points each) b) Name one place where markets have been successful in health care? (4 points) c) What would you do to improve health care markets in the United States (5 points total) Page 4 of 4 1012 words X English (United States) Focus E + 152%