HSPM 712 J50: Health Economics


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We have $35 to allocate between two projects.



ONLY Q 5 & Q 6

1. Behavioural economics discussions often start from the observation that in many circumstances people are “consistently irrational”. This implies that-

A. The neoclassical economics assumption of rationality and welfare maximisation behaviour is not valid

B. Because of psychological aspects of decision-making, people suspend utility or welfare maximisation behaviour under some specific situations

C. “Nudging” people to do the right thing when they are behaving “irrationally” is not possible


In certain circumstances, human brain cannot fully evaluate the alternatives as it requires evaluation or understanding of very low probabilities


2. One of the reasons why physicians earn more money per hour than nurses is:

A. Costs of producing physicians are usually much higher than costs of producing nurses

B. Number of physicians in the market are much lower than the number of nurses

C. Physicians “main objective is “maximizing income” while main objective of nurses is to “help improve and protect health of patients”


When the costs of production are higher the salary/remunerations are also usually higher. Nowadays we observe the salary of the nurses is increasing with their increasing attainment of higher degrees, which also involve costs.


3. The dominant objective of taxi drivers in the city of Cola is to earn a target income of $60,000.00 per year. If the earning per hour of taxi drivers goes up, they will work-

A. More hours per day on the average as they can earn more money now

B. Same hours as before as their income will go up anyway with the same level of work

C. Less hours per day on the average



If the prime objective is to attain a fixed amount, then the taxi driver will stop working after attaining the amount. Thus with increasing earning per hour the taxi driver will work less.


4. Cost of producing physician consultant service is given by the equation: C = 40000 + 15Q, where C is the cost per year and Q is the number of consultations supplied in a year. If Q = 2000 for a physician, the average and marginal cost at Q = 2000 should be-

A. $35 and $30 respectively

B. $20 and $15 respectively

C. $35 and $15 respectively



Average cost, AC= Total Cost (TC)/Quantity (Q)

Here AC= (40000+15*2000)/2000 = 70000/2000 = $35

Marginal Cost= cost at production 2000 – cost as production 1999 = (40000+15*2000)-(40000+15*1999)

= 40000 + 15*2000 – 40000 -15*1999 = 15


5.We have $35 to allocate between two projects. Benefits and costs of the projects are shown in the table below by levels of costs or expenditures in the projects. How would you allocate $35 between these two projects to maximize total benefits.

ExpenditureBenefits of Project ABenefits of Project B


A)Allocate the full $35 to Project A and nothing to Project B as Project A produces lot more benefits than project B at any level of expenditures

B)$20 to Project A and $15 to Project B

C)$25 to Project A and $10 to Project B


Applying marginal rule for allocation, first $5 will go to project A as the marginal is higher for project A than project B. Second $5 will go to project B. After that additional $15 will be used in project A (marginal remains higher for A). Allocation will be $20 in project A and $15 to project B to maximise social welfare/social benefit.

ExpenditureBenefits of Project AMarginal Benefit from Project ABenefits of Project BMarginal Benefit from Project B


6.If adopted, child immunisation project will prevent 100 deaths this year. Another project intended to improve nutritional status of children will prevent 110 deaths three years from now. In terms of health outcome (deaths prevented), which project is better from the societal perspective if the rate of discount or the “time-tradeoff” is 10%?

A)Child immunisation project is better

B)Nutritional intervention project to improve nutritional status of child is better

C)Both projects are equally good


If the outcome is 110 one year from now, the discounted value will be 100 today, same as the immunisation project. Since the outcome of 110 happens three years from now, clearly the discounted value will be significantly lower than 100. So, child immunisation project is better.

If you actually want to do the calculation, discounted benefit from Nutritional Project is = 110/(1.10)3 = 82.64 deaths prevented

Thus the child immunisation program is better (100 deaths averted this year) than the nutritional project.


7. Fixed cost of hospitals is usually a large proportion of the total cost. In other words, the variable cost represents a relatively small part of total cost. When the fixed costs are very high compared to variable costs, the average total cost curve

A. starts increasing from a very low level of production

B. shows a declining trend over a wide range of production, from low production level to high level of production

C. shows a U-shape pattern over the usual range of production levels of hospitals in the market


If fixed cost represents a very high proportion of total cost, total cost will be very close to fixed cost and will remain more or less close to fixed cost level for wide range of production. Average cost is defined as total cost divided by quantity of output produced. If the total cost is very close to fixed cost, as shown in the diagram below, increasing quantity of output will imply that the average cost declines for even high levels of output. This is because if you divide a “relatively constant” number by an increasing number Q, the ratio will decline with increasing Q. Therefore Total cost/Q will continue to decline and it will show an increase only after the variable cost becomes important in total cost.




8. For a profit-maximizing firm (hospital or clinic or any other facility), supply curve is the-

A. Average Cost curve of the firm

B. Total Cost curve of the firm

C. Marginal Cost curve of the firm



For a profit-maximizer supply curve is the upward going part of the marginal cost curve.



9. Consider the price of three items in 2000 and 2014 as shown in the table below:

ItemPrice in 2000Quantity in 2000Price in 2014

If the price index for the year 2000 is 100, price index for 2014 should be about-

A. 78

B. 115

C. 129


Total expenditure on three items in 2010 = 10*30+3*100+5*60 = 300+300+300 = 900

Total expenditure in 2014 if year 2000 quantities are used =20*30 + 2*100 + 6*60 = 600+200+360 = 1160

So, Price Index for 2014 given that 2000 price index is 100 = (1160*100/900) = 129


10. National Health Expenditure (NHE) in USA in 1980 was $256 billion and in 2013 it was $2.92 trillion.

Price index was 44.38 in 1980 and 106.73 in 2013 when 2009 prices are used as base. Real NHE of USA in

1980 in term of 2013 prices were about-

A. $1,250 billion

B. $577 billion

C. $616 billion


National Health Expenditure of USA in 1980 in terms of 2013 prices can be calculated as:

(NHE in USA in 1980 prices)*(Price Index in 2013/Price index in 1980)

= $256 billion*(106.73/44.38)

= $616 billion

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