Economics 504 and Health Care Management 504 

Possible Test Questions and Review

Midterm Exam

1. In class, we discussed two different types of efficiency: technological (productive) efficiency and allocative (consumption) efficiency. Do the following:
a. Carefully define each type of efficiency. Briefly explain the similarities and differences between each type.
b. For most firms, profit maximization ensures that the firms will be technologically efficient. Why? Briefly explain your answer.
c. For most industries, competition ensures that the industry will be allocatively efficient. Why? Briefly explain your answer.
d. Contrary to most firms, we suggested that profit maximizing firms in the medical industry may not be technologically efficient. Why? Briefly explain your answer.
e. Contrary to most industries, we suggested that competition may not ensure allocative efficiency in the medical industry. Why? Briefly explain your answer.

2. Carefully define the following terms in a few sentences.
a. marginal benefit
b. scarcity
c. the "law" of demand
d. consumer surplus
e. stable equilibrium
f. positive externality
g. average variable cost
h. coinsurance
i. production function
j. productivity of medical care on the intensive margin
k. transitive preferences
l. cost minimization
m. budget constraint
n. marginal utility
o. indifference curve
p. medical care
q. consumer price index
r. demand for health
s. the full price of medical care
t. the patient's agent
u. induced demand for medical care
v. isoquant
w. lemon principle
y. cost effectiveness analysis
z. discount rate
aa. statistically significant
bb. multiple regression analysis

3. Give a brief answer to all of the following questions.
a. Briefly define "medical care need" and "demand for medical care". Briefly discuss the similarities and differences of the two concepts. Briefly explain, using graphical analysis, the likely impact of the use of medical care need for planning in the medical industry.
b. Currently expenditures on hospital services account for approximately 50 percent of total spending on medical care. In addition, physician services are much less costly than hospital services. As a result, it has been argued that one way to reduce high medical care costs is to subsidize physician education. Comment on the effectiveness of this proposal. (Under what conditions would the proposal be effective in reducing expenditures?) Briefly explain.
c. What impact does an increase in the supply of nurses have upon the market for nurses and the market for physicians? What assumptions must be made to answer this question? Briefly explain.
d. We suggested in class that it was difficult to measure either health or medical care. Why? Why is this issue important from a public policy standpoint?

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