1. Physician-induced demand
   1. Define induced demand and distinguish it from physician agency.

Read the abstract below, use it for parts b through d of this question.

The "induced-demand" model states that in the face of negative income shocks, physicians may exploit their agency relationship with patients by providing excessive care. We test this model using an exogenous change in the financial environment facing obstetrician/gynecologists: declining fertility in the United States. We argue that the 13.5% fall in fertility over the 1970-1982 period led ob/gyns to substitute from normal childbirth toward a more highly reimbursed alternative, cesarean delivery. Using a nationally representative data set for this period, we show that there is a strong correlation between within-state declines in fertility and within-state increases in cesarean utilization.

Gruber, J., & Owings, M. (1996).

Physician financial incentives and cesarean section delivery.

The Rand Journal of Economics, 27(1), 99-123.

1. Demonstrate your comprehension by explaining how the abstract provides evidence of induced demand, meeting your definition provided 3a.
2. Draw a graph showing the change in the quantity of Cesarean sections demanded. Label axes, supply, demand, price, and quantity.
3. Describe a policy approach that could mitigate this kind of induced demand. According to research evidence, what impact would this policy approach have on the quality of care provided?