Health Economics and Policy, 8th Edition Solution Manual by
James W. Henderson.
1 Opportunity cost is a measure of
a. foregone opportunities.
b. value based on the alternative not chosen.
c. value in terms of the cost of production.
d. the difference between production cost and resource cost.
e. both a and b.
2. The opportunity cost of investing in a new lithotripter (a machine that pulverizes kidney stones
with sound waves) is
a. defined by the dollar cost of the equipment.
b. the same for every health care provider.
c. measured by the difference between the expected revenues from selling the services of
the lithotripter and the invoice cost of the machine.
d. defined by the next best use of the money invested in the equipment.
e. impossible to calculate.
3. The “invisible hand” using Adam Smith’s terminology refers to
a. government control of the market.
b. market forces working through the price mechanism.
c. the money supply that serves to keep the economy working smoothly.
d. the role of innovation in maintaining a steady rate of growth.
e. “behind-the-scenes” policy making to influence how markets allocate scarce resources.
4. According to recent public opinion polls, what percentage of Americans are satisfied with the
quality of the medical care they receive?
a. 15 percent.
b. 40 percent.
c. 65 percent.
d. 70 percent.
e. 90 percent.
5. Charging higher prices for one category of patients in order to provide free or subsidized care
to another group is called
a. price discrimination.
b. cost-shifting.
c. categorical costing.
d. reprehensible and unethical.
e. creative accounting.
,6. According to economic theory what is the optimal percentage of GDP to be spent on medical
care?
a. 6 percent.
b. 8 percent.
c. 10 percent.
d. 12 percent.
e. There is no widely-accepted way to determine the optimal percentage.
7. What phrase best describes medical care spending in the United States in 1998?
a. Total spending of more than $2 trillion represents 17 percent of GDP and
approximately $8,000 per capita.
b. Total spending of more than $1 trillion represents 14.8 percent of GDP and almost $6,000
per capita.
c. Total spending of less than $1 trillion represents less than 13 percent of GDP and almost
$3,000 per capita.
d. Total spending is rising at double-digit rates and spending is soaring to over $5,000 per
capita.
e. Total spending is under control and represents a shrinking percentage of GDP.
8. The 1974 federal legislation that exempted employers from certain state laws governing health
insurance was
a. COBRA
b. ERISA
c. CON
d. HIPAA
e. SCHIP
9. Which of the following statements is based on positive analysis?
a. Individuals without health insurance have less access to physicians’ services than those
who have health insurance.
b. The high cost of health insurance places U.S. firms at a competitive disadvantage with
their foreign competitors.
c. Employers should be required to provide health insurance for all full-time workers and
their dependents.
d. none of the above.
e. Both a and b.
10. Economists use the term “marginal” to describe costs and benefits
a. that are minimal and hardly worth noting.
b. that are incremental and thus relevant to decision making.
c. that are noteworthy but not the most important.
d. whose importance can be minimized through hard work.
e. none of the above.
,11. Self insurance refers to: the practice of setting aside funds to pay for medical care expenses
instead of paying premiums to an insurance company. Approximately, _______ of all employees
who participate in group insurance plans work for firms that self-insure.
a. starting one’s own insurance company
b. buying insurance from a not for profit entity
c. setting aside fund to pay for medical care expenses instead of buying insurance
d. none of these
e. both a and b
12. Which of the following is not a characteristic that makes medical care different from other
commodities?
a. Demand for medical care is irregular.
b. Sellers have more information than buyers.
c. Third-party payers abound.
d. For-profit providers play a major role in delivering medical care.
e. The transaction itself if filled with uncertainty.
Structured Discussion:
1. Resolved: The United States system of health care delivery is in a state of crisis.
2. Resolved: The recent slowing of health care spending as a share of gross domestic
product will continue. In other words, the relative size of the health care sector has
reached a natural limit.
Appendix 1A: The Medical Care Price Index
This appendix demonstrates the use of price indexes to measure price changes. Caution is advised
in interpreting changes in fixed-weight indexes, such as the Consumer Price Index (CPI) and the
Medical Care Price Index (MCPI), as a measure of inflation. Problems in using the MCPI to
measure medical inflation are discussed, including what to measure, how to account for quality
improvements, and how to incorporate new products into the index.
Appendix Objectives
1. Summarize the issues involved in measuring price changes with price indexes.
2. Describe the use of the medical care price index in measuring changes in medical care
prices.
3. Specify alternatives for measuring price changes.
, Appendix Outline
a. Measuring price changes with index numbers
b. Medical care price index
c. Problems with using a fixed-weight index as a measure of inflation
d. Measuring inputs instead of outcomes
e. Measuring quality changes
f. Accounting for new products
g. Other problems
h. Alternative methods to measure medical care inflation
i. Summary and conclusions
Chapter 2: Using Economics to Study Health Care Issues
This chapter introduces the basic economics model of supply and demand and examines its use in
the study of health care issues. A discussion of the principles of optimizing behavior sets the stage
for the development of the model of demand and supply. A discussion of the theory of the firm
follows, contrasting perfect and imperfect competition. Supply- and demand-side imperfections
are also discussed.
Chapter Outline
a. The relevance of economics in health care
1. Critical assumptions in economics
2. The scientific method
3. Model building
4. Problem solving
b. Economic optimization
c. Supply and demand
1. The law of demand
2. Price elasticity of demand
3. The law of supply
4. Equilibrium
d. The competitive model
1. Theory of firm behavior
2. Price Ceilings and Price Floors
3. The Impact of an Excise Tax
James W. Henderson.
1 Opportunity cost is a measure of
a. foregone opportunities.
b. value based on the alternative not chosen.
c. value in terms of the cost of production.
d. the difference between production cost and resource cost.
e. both a and b.
2. The opportunity cost of investing in a new lithotripter (a machine that pulverizes kidney stones
with sound waves) is
a. defined by the dollar cost of the equipment.
b. the same for every health care provider.
c. measured by the difference between the expected revenues from selling the services of
the lithotripter and the invoice cost of the machine.
d. defined by the next best use of the money invested in the equipment.
e. impossible to calculate.
3. The “invisible hand” using Adam Smith’s terminology refers to
a. government control of the market.
b. market forces working through the price mechanism.
c. the money supply that serves to keep the economy working smoothly.
d. the role of innovation in maintaining a steady rate of growth.
e. “behind-the-scenes” policy making to influence how markets allocate scarce resources.
4. According to recent public opinion polls, what percentage of Americans are satisfied with the
quality of the medical care they receive?
a. 15 percent.
b. 40 percent.
c. 65 percent.
d. 70 percent.
e. 90 percent.
5. Charging higher prices for one category of patients in order to provide free or subsidized care
to another group is called
a. price discrimination.
b. cost-shifting.
c. categorical costing.
d. reprehensible and unethical.
e. creative accounting.
,6. According to economic theory what is the optimal percentage of GDP to be spent on medical
care?
a. 6 percent.
b. 8 percent.
c. 10 percent.
d. 12 percent.
e. There is no widely-accepted way to determine the optimal percentage.
7. What phrase best describes medical care spending in the United States in 1998?
a. Total spending of more than $2 trillion represents 17 percent of GDP and
approximately $8,000 per capita.
b. Total spending of more than $1 trillion represents 14.8 percent of GDP and almost $6,000
per capita.
c. Total spending of less than $1 trillion represents less than 13 percent of GDP and almost
$3,000 per capita.
d. Total spending is rising at double-digit rates and spending is soaring to over $5,000 per
capita.
e. Total spending is under control and represents a shrinking percentage of GDP.
8. The 1974 federal legislation that exempted employers from certain state laws governing health
insurance was
a. COBRA
b. ERISA
c. CON
d. HIPAA
e. SCHIP
9. Which of the following statements is based on positive analysis?
a. Individuals without health insurance have less access to physicians’ services than those
who have health insurance.
b. The high cost of health insurance places U.S. firms at a competitive disadvantage with
their foreign competitors.
c. Employers should be required to provide health insurance for all full-time workers and
their dependents.
d. none of the above.
e. Both a and b.
10. Economists use the term “marginal” to describe costs and benefits
a. that are minimal and hardly worth noting.
b. that are incremental and thus relevant to decision making.
c. that are noteworthy but not the most important.
d. whose importance can be minimized through hard work.
e. none of the above.
,11. Self insurance refers to: the practice of setting aside funds to pay for medical care expenses
instead of paying premiums to an insurance company. Approximately, _______ of all employees
who participate in group insurance plans work for firms that self-insure.
a. starting one’s own insurance company
b. buying insurance from a not for profit entity
c. setting aside fund to pay for medical care expenses instead of buying insurance
d. none of these
e. both a and b
12. Which of the following is not a characteristic that makes medical care different from other
commodities?
a. Demand for medical care is irregular.
b. Sellers have more information than buyers.
c. Third-party payers abound.
d. For-profit providers play a major role in delivering medical care.
e. The transaction itself if filled with uncertainty.
Structured Discussion:
1. Resolved: The United States system of health care delivery is in a state of crisis.
2. Resolved: The recent slowing of health care spending as a share of gross domestic
product will continue. In other words, the relative size of the health care sector has
reached a natural limit.
Appendix 1A: The Medical Care Price Index
This appendix demonstrates the use of price indexes to measure price changes. Caution is advised
in interpreting changes in fixed-weight indexes, such as the Consumer Price Index (CPI) and the
Medical Care Price Index (MCPI), as a measure of inflation. Problems in using the MCPI to
measure medical inflation are discussed, including what to measure, how to account for quality
improvements, and how to incorporate new products into the index.
Appendix Objectives
1. Summarize the issues involved in measuring price changes with price indexes.
2. Describe the use of the medical care price index in measuring changes in medical care
prices.
3. Specify alternatives for measuring price changes.
, Appendix Outline
a. Measuring price changes with index numbers
b. Medical care price index
c. Problems with using a fixed-weight index as a measure of inflation
d. Measuring inputs instead of outcomes
e. Measuring quality changes
f. Accounting for new products
g. Other problems
h. Alternative methods to measure medical care inflation
i. Summary and conclusions
Chapter 2: Using Economics to Study Health Care Issues
This chapter introduces the basic economics model of supply and demand and examines its use in
the study of health care issues. A discussion of the principles of optimizing behavior sets the stage
for the development of the model of demand and supply. A discussion of the theory of the firm
follows, contrasting perfect and imperfect competition. Supply- and demand-side imperfections
are also discussed.
Chapter Outline
a. The relevance of economics in health care
1. Critical assumptions in economics
2. The scientific method
3. Model building
4. Problem solving
b. Economic optimization
c. Supply and demand
1. The law of demand
2. Price elasticity of demand
3. The law of supply
4. Equilibrium
d. The competitive model
1. Theory of firm behavior
2. Price Ceilings and Price Floors
3. The Impact of an Excise Tax
