GLBH0030 – Microeconomics for Health MSc HEDS
Microeconomics for Health MSc HEDS
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GLBH0030 – Microeconomics for Health MSc HEDS
Final Assessment
Instructions: This is a take home assignment, which has a total of 100 marks. This as-
signment is an individual task and you must not consult with your class mates or colleagues
about the content of this assignment.
Please submit your assignment through the submission inbox set up on Moodle. You may
submit the assignment as a MS Word document or as a PDF document. Please take care
to write legibly if you choose to insert pictures of hand-written parts.
There are five questions in Section 1 and three problems in Section 2. You must answer
all of them. Please take care to answer all sub-parts of the questions.
Your answer must be detailed and show your knowledge of the topic. You can use graphs,
examples, references, formulas to support your answer. You also need as well to keep your
answers within the word limit.
1
GLBH0030 – Microeconomics for Health MSc HEDS
Section 1. True/False questions [25 marks]
Please answer True or False and explain why in no more that 150 words per question. You
may use graphs, tables, formulas, and references to support your answer. Graphs, tables,
and formulas will not count for word limit. All questions in this section are compulsory.
1.1 In the Neverland Island there is only one firm providing computed tomography scan-
ners to hospitals. This is a monopoly market and therefore not beneficial for patients.
[5 marks]
1.2 Antibiotic resistance is an example of a positive externality. [5 marks]
1.3 The Council of Summerstorm wants to build a new hospital in the city and finance
the construction using public tax resources. The construction of the new hospital is
a Pareto improvement. [5 marks]
1.4 If the price of one good increases, the consumption of that good increases. [5 marks]
1.5 In the absence of government interventions, the provision of a public good is not
Pareto efficient. [5 marks]
2
GLBH0030 – Microeconomics for Health MSc HEDS
Section 2. Problems [75 marks]
Please answer in no more than 1,000 words in total. You may use examples, graphs,
tables, formulas, and references to support your answer. Graphs, tables, and formulas will
not count for word limit. All questions in this section are compulsory.
2.1. Problem 1 [25 marks]
Suppose a consumer owns £50 and has to choose between a marketed brand-name paraceta-
mol (M) and a generic paracetamol (G). M costs £10, while G costs £5. The consumer has
preferences over the two types of paracetamol represented by the following utility function:
u(x1, x2) = 3xM + 2xG,
where xM and xG represent the quantity of M and G, respectively.
2.1.1 Illustrate the consumption set and the budget set. [5 marks]
2.1.2 Write the utility maximisation problem for the consumer. [5 marks]
2.1.3 Using a graphical representation, find the consumer’s optimal bundle. [10 marks]
2.1.3 Discuss whether the preferences used in this exercise are appropriate for modelling
the consumer choice for generic and marketed brand-name drugs. [5 marks]
2.2. Problem 2 [25 marks]
Consider a market where two firms produce antibody tests to assess the presence of SARS-
CoV-2 (the test can be considered a homogeneous good). Each firm faces the same marginal
cost c = 2 and the same fixed cost f = 1 to produce tests. Assume the market demand for
tests is given by the following function
q = 10− p,
where p is the price for the test.
Firms simultaneously choose the price at which they will sell their products, i.e., p1
and p2, and produce the quantity according to the market demand.
2.2.1 Write the profit function for each firm. [5 marks]
2.2.2 Show that (p1, p2) = (2, 2) is a Nash equilibrium. [5 marks]
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GLBH0030 – Microeconomics for Health MSc HEDS
2.2.3 Show that (p1, p2) with pi > 2 for each i = 1, 2 is not a Nash equilibrium. [5 marks]
2.2.4 At the equilibrium, how many tests do the firm produce? And how much does each
firm earn? [5 marks]
2.2.5 Discuss how these findings compare with a perfect competition scenario and with a
Cournot duopoly scenario. [5 marks]
2.3. Problem 3 [25 marks]
An insurance company would like to offer a contract to two workers to cover their medical
expenses against job injury. The company knows one worker has a high risk of injury (i.e.,
2
3) and the other worker has a low risk of injury (i.e.,
1
3), but it does not know exactly who
the worker with high risk and the worker with low risk are.
The contract consists of a benefit b (i.e., the amount of money the worker gets in case
she is injured) and a premium p (i.e., the amount of money the worker pays for the insur-
ance). The company sets two types of contracts: l = (150, 10) and h = (300, 105). The
injury has a monetary cost for the worker equal to £300.
Then, a contract can be formally written as ci = (b, p), where i = l, h.
The company first goes to one worker and propose a contract, and then goes to the
other worker and propose another contract. Each worker can choose to accept or reject
the offer based on their expected payoff.
2.3.1 Describe the expected payoff for both workers. [5 marks]
2.3.2 What contract does the low-risk worker choose, if any? And the high-risk worker? [5
marks]
2.3.3 Discuss whether these two contracts allow the company to screen consumers and
compare this to the situation where the company only offers the contract (300, 105).
[5 marks]
2.3.4 Is the assumption of expected payoff representing workers’ preferences reasonable?
What happens if we assume workers are risk lovers? [10 marks]