Whenever relevant, begin your assessment of the questions below with a statement as to whether the statement is True or False.Use tools of economic analysis such as graphs where appropriate.Don’t just insert graphs, explain them.

Points will be deducted for answers that are too long, so be brief and to the point. Points will be deducted for graphs that are not relevant.Points will be deducted if all curves, axes, and relevant points of interest are not labeled very clearly in graphs.Lastly, sloppy or unprofessionally presented work will be penalized.

READ everything carefully!A tricky word here or there can change the results.

GOOD LUCK, AND THANKS FOR A GREAT SEMESTER.

Analytic Critique and Essay Questions

(1.)A foundation is considering supporting a health-intervention project that has been proposed by a local community health center.The foundation will base its decision about whether or not to fund the project strictly by considering the project’s financial benefits and costs.The project costs are $12 million at project inception (Year 0) plus $1 million per year in Years 1, 2, 3, 4 and 5.The present value of project benefits is estimated to be

$16 million.(“Year 0” means today, “Year 1” means one year from today, “Year 2” means 2 years from today, and so on.)

(a)At discount rate of 5%, should the foundation support or reject this project?

(b)At a discount rate of 10%, should the project be supported or rejected?

(2.)Consider the following information on Ian’s demand for visits per year to his health clinic, which is based upon the fact that his insurance does not cover clinical visits (that is, based upon a 100% coinsurance rate):

Price	Quantity
$60	7
$50	8
$40	9
$30	10
$20	11
$0	12

a.Ian has been paying $30 per visit (V).How many visits does he “consume” per year?Draw his demand curve.

b.Suppose now that Ian’s insurance company institutes a 70% coinsurance feature (that is, Ian pays 70% of the price of each visit).Show what happens to the demand curve.What is Ian’s new equilibrium quantity?

c.Appraise this statement: Compared with a 70% coinsurance rate as in part (b),

Ian’s price elasticity of demand would lower if the coinsurance rate was 60%.

(No calculations are needed to answer this question, so don’t calculate elasticity!)

(2.)Two competing hospitals, Hospital A and Hospital B4, are considering investing in cutting-edge 3-D printing technology that can be used to improve prosthetics for patients, to enhance joint replacement surgery, and in the future could revolutionize organ transplants, such as duplicating body parts like the outer ear.

Consider Box 1 below, which shows the net present value of the investment choices made for each hospital (Hospital A’s net present value amounts are shown first in each cell, Hospital B’s are shown second).Neither hospital knows what the other hospital will do; furthermore, antitrust laws prohibit them from cooperating with one another.Suppose that the hospitals do not face regulatory restrictions, such as certificate of needs.To simplify, it is assumed that if a hospital does Not Invest in the 3-D equipment, that it will choose an alternative project that will generate revenue, which is why there are positive values in the “Do Not Invest” cells.

a.Which decision, Invest or Not Invest – will each hospital make?Explain.

b.If the hospitals could cooperate with one another, then would there be a different outcome?Briefly explain.

c.Generally speaking (not just in reference to Box 1), why might a hospital’s decision to invest in technology increase net present value by more if competitors did not also invest in the same equipment?(Limit your answer to one sentence.)

Box 1. Figures in Millions ($).

Hospital A		Hospital B
		Invest	Do Not Invest
	Invest	3, 3	8, 2
	Do Not Invest	2, 8	7, 6

 

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