If the elasticity of aggregate cigarette demand with respect to advertising were 0.15, by extrapolation, what is the effect of each of the following on cigarette consumption:
(a) 10% reduction in advertising?
(b) 50% reduction in advertising?
(c) Ban on cigarette advertising, i.e. 100% reduction in advertising?
In Becker and Murphy's "rational addicts" model, smokers are perfectly aware of the potential for smoking to cause addiction, and they take this into account when deciding whether or not to smoke. Suppose a new technology-such as a nicotine patch-is invented that makes quitting smoking much easier (less costly) for an addict. If Becker and Murphy's model is correct, what effect would you expect this invention to have on people's smoking behavior? Would your answer be different for teenagers than for long-term smokers?
I. The Production of Health
Provide an example of a situation where marginal productivity would decline because of an increase on the extensive margin. Please try to use a real-life example for a specific medical treatment.
The CPI for hospital care (as one example) measures the cost of a two-person "hospital room and board" charge as an important part of the CPI hospital index. The cost of a day in the hospital has increased from $329 in 1980 to $2025 in 2010.
The CPI was 82.4 in 1980 and 218.06 in 2010 and the Medical CPI was 74.9 in 1980 and 388.4 in 2010.
(a) From the data given, can we conclude that the price of a day in the hospital has increased dramatically in 30 years?
(b) Does the difference in the change in the general CPI compared to the change in the Medical CPI clearly indicate that there has been more inflation in the medical industry than overall in the economy?
(c) In his 2014 State of the Union Address, the President claimed that rising cost of health care "eats up more and more of our savings each year". Are patients definitely worse off with the higher prices?
People living in Boston are hospitalized about 1.5 times as often as those living in New Haven, yet their health outcomes, based on age-specific mortality rates, appear to be identical. Does this mean that hospital care has no ability to improve health?