Problem set 1

Problem 1 (10 points):

You are offered an investment opportunity in which you will receive $25,000 in one year in exchange for paying $23,750 today. Suppose the risk-free rate is 6% per year. Should you take this project? The NPV for this project is closest to:

(1)Yes; NPV = $165

(2)No; NPV = $165

(3)Yes; NPV = -$165

(4)No; NPV = -$165

Explain your answer below.

Problem 2 (10 points):

A specialist dermatology and cosmetic surgery chain is considering opening a clinic in Germany that requires an investment of $250,000 today and will produce a cash flow of 208,650 Euros in one year with no risk. Suppose the risk-free rate of interest in Germany is 7% and the current competitive exchange rate is 0.78 Euros to 1 Dollar. What is the NPV of this project? Would you advise them to take the project?

(1)NPV = 0; No

(2)NPV=$2,358; No

(3)NPV=$2,358; Yes

(4)NPV=$13,650; Yes

Explain your answer.

Problem 3 (10 points):

Alison inherited her father's MD office, but she is not a physician and has no interest in running it. A local doctor who just got her degree and wants to settle back in town is offering to buy the office. In exchange, Alison has been offered an immediate payment of $100,000. She will also receive payments of $50,000 in one year, $50,000 in two years, and $75,000 in three years. The current market rate of interest for Alison is 6%.

Suppose that a second doctor approaches Alison and offers her $250,000 today for the business. Should she accept this offer or should she stick with the original offer of $100,000 and the series of payments over three years? Why?

Problem 4 (10 points):Which of the following reimbursement and consumer copayment schemes would have the greatest and lowest likelihood of producing high-cost, low-benefit medicine? Explain your answers below.

A. Fee-for-service plan with 40 percent consumer co-insurance.

B. Prepaid health plan with 40 percent consumer co-insurance - assume the physician receives a fixed fee per patient (pre-paid) and the patient has to pay 40% of any cost of usage.

C. Fee-for-service plan with no consumer cost sharing.

D. Fixed-salary plan with no consumer cost sharing -assume physicians are paid a fixed salary independent of how many patient they see and how often they see the patients.

E. Prepaid health plan with no consumer cost sharing - assume physicians are paid a pre-determined flat fee per patient and the patient does not have to pay any additional costs of usage.

F. Fixed-salary plan with 40 percent consumer cost sharing.

Problem 5 (10 points):

Explain the effect of the following changes on the quantity demanded of health insurance.

A. A reduction in the tax-exempt fraction of health insurance premiums

B. An increase in buyer income

C. An increase in per capita medical expenditures

D. New technologies that enable medical illnesses to be predicted more accurately.

E. A tendency among insurance buyers to become less risk averse, on average.