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Friday, September 08, 2006

Microeconomics Quiz of the Week

From the Wall Street Journal's weekly microeconomics summary:
"Health-care spending may be soaring, but the increased outlays over the last 40 years are worth the price in terms of extended U.S. life expectancy, a new study argues. That conclusion, reached by researchers at Harvard University and the University of Michigan." The researchers found that improved medical care results in 3.5 extra years of life expectancy at a cost of $19,900 per year. The[y] also found that as one gets older, gains in life expectancy are not as steep, and the costs start to pile up. "For example, a person aged 65 in 1960 could have expected to live an additional 14.4 years, whereas a 65-year-old in 2000 can expect an extra 18 years, a gain of 3.5 years. But the cost per year of life gained through medical care was, on average, $84,700. The cost between 1960 and 1970 was $75,100, whereas between 1990 and 2000 it was $145,000."

One interesting note in the article is that increases in life expectancy can be attributed not only to improved medical care, but also to other factors such as reduced smoking and better exercise habits. One challenge of research on life expectancy is isolating the effects of each of these factors on increased life.

1.) How do economists determine whether improved and more costly health care is worth the increased expenditure? Discuss economic productivity and the value of staying alive.

2.) Use marginal benefit and marginal cost of medical expenditures to determine whether increased expenditures are worthwhile. What is the marginal benefit of increased expenditures?

3.) For people who have reached the age of 65, are gains in life expectancy that can be attributed to improved health care worth the cost? Use marginal analysis to answer the question.

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