Develop a Theory to Explain This Apparently “Irrational” Behavior


How this new tax will affect hospital supply curve?


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1.Why do physicians want to keep patients longer in the hospital (higher days of stay) after major surgeries than the hospital administrators? An economist says, the explanation is quite simple – one only have to understand why people tend to consume lot more food in “all you can eat” buffet than in restaurants where they pay for each of the food plates separately. Do you agree with the premise that we tend to eat more food in ‘all you can eat’ buffet? Why? How can you apply the logic to explain the decision-making of physicians related to length of hospital stay? You may assume that the objective of physicians is to improve wellbeing of patients as much as possible (physicians act in the best interest of patients).


2.There are two hospitals in a rural community. The supply curves of these two hospitals are given by the equations below:

Hospital A:                          SA = -80+0.4 P,

Hospital B:                           SB = -90+0.6 P

where Si is the quantity of hospital services supplied by hospital “i” (A or B) and P is the price of hospital services.Note that SA or SB cannot be negative. Find the market supply curve and draw the market supply curve in a diagram.


3.Define the terms “current” health care expenditure in a year and “real” health care expenditure in the year. How do we convert current expenditures into real expenditures? Illustrate your answer by using hypothetical numbers.


4.A not-for-profit entity has $70 to spend on two different projects, project 1 and project 2. The benefits derived from the projects at different levels of expenditures are shown in the table below. Allocate the money between these two projects to maximize total social benefit. If the budget increases to $100, how would you allocate the money between these two projects?

Expenditure on project 1 ($) Benefit obtained, project 1 ($) Expenditure on project 2 ($) Benefit obtained, project 2 ($)
 10 600 10 200
 20 1000 20 370
 30 1200 30 520
 40 1350 40 660
 50 1450 50 790
 60 1500 60 910
 70 1550 70 1000


5.A health reform plan recommends introducing a tax of $20 per day on hospital stays. How this new tax will affect hospital supply curve? Draw a diagram to illustrate your answer.

Extra point question.

6.One research study found that taxi cab drivers in New York City work less (lower hours of work per day) during rainy days than during clear sunny days. This is interesting because the earning per hour on rainy days is much higher than per-hour earning on clear sunny days. Develop a theory to explain this apparently “irrational” behavior.


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