1. Suppose that you are in year zero and you are conducting a cost-benefit analy
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Question
1. Suppose that you are in year zero and you are conducting a cost-benefit analysis for two different medical care treatments with the following characteristics. Both have costs of $5,000 ONLY in Year 1. Treatment 1 provides benefits of $2,000 in each of the first four years only. The second treatment provides benefits of $2,000 for each of Years 6 to 10 only. For this problem ignore inflation.
a). Complete the table in the excel file I provide for this problem. (As an example, I provide the numbers that correspond to year 0 and year 1 for each column. Remember that the present value (PV) formula is: PV = FV/(1+r)t, where r is the discount rate and t refers to the number of periods between year 0 and the year that you are looking into the future.
b). Would any of these treatments pass the cost-benefit analysis? Carefully explain.
2. Use the information below to answer the following questions.
Life-years gained
Health-utility index
Current Treatment
4 years
New Treatment
10 years
a). Calculate the incremental cost-effectiveness ratio. Show ALL your work.
b). Given the information given in the table, calculate the number of quality-adjusted life-years (QALYs) for each treatment. Show ALL your work.
c). Calculate the cost-utility index for the new treatment. Show ALL your work.
3. Suppose that the price elasticity of demand a clinic is -2.5.
a). Calculate the percentage change in the number of visits if the clinic increases its price per unit by 15%. Show ALL your work.
b). Based on the information given, would you recommend a price increase if the objective is to increase this clinic’s total revenue? CAREFULLY EXPLAIN your answer.
4. The table below shows Liz’s total utility (TU) from candy bars and potato chips. Her budget is $4 per day. The price of a candy bar is $1.00 and the price of a bag of chips is $1.00.
Candy Bars
Potato Chips
Q
TU
MU
MU/P
Q
TU
MU
MU/P
0
0
4
22
1
10
3
19
2
19
2
15
3
27
1
8
4
29
0
0
a). Fill in the last two columns in each table. (Remember that the formula for marginal utility (MU) is: ?TU/?Q.)
b). What combination of candy bars and potato chips should she consume in order to maximize her total utility? Carefully explain.
Life-years gained
Health-utility index
Current Treatment
4 years
New Treatment
10 years
Treatment 1 PV Net benefits (PV PV of Costs, assuming a 12% discount rate PV of benefits assuming a 12% discount rate Benefits-PV Costs), assuming a 12% discount rate Costs Benefits 2000 2000 2000 2000 4464 1786 2678 10 Aggregated Net Benefits (2,678) Treatment 2 PV of Costs, assuming a 12% discount rate PV of benefits assuming a 12% discount rate PV Net benefits (PV Benefits-PV Costs). Costs Benefits assuming a 12% discount rate 4464 4464 2000 2000 2000 2000 2000 10 Aggregated Net Benefits 4,464)Explanation / Answer
(1)
(a)
(b) Benefit-cost ratio (BCR) = PV of Benefits / PV of costs.
For Treatment 1, PV of Benefits > PV of costs and aggregated net benefits is positive, therefore BCR will be higher than 1. Treatment 1 will pass the cost-benefit analysis. But for Treatment 2, PV of Benefits < PV of costs and aggregated net benefits is negative, therefore BCR will be lower than 1. Treatment 1 will not pass the cost-benefit analysis.
NOTE: As per Chegg Answering Policy, first question has been answered.
TREATMENT - 1 Year Cost Benefit PV Factor @12% PV of Costs @12% PV of Benefits @12% PV of Net Benefits @12% (A) (B) (C) (D)=(A)x(C) (E)=(B)x(C) (E) - (D) 0 0 0 1.0000 0 0 0 1 5000 2000 0.8929 4464 1786 -2679 2 2000 0.7972 0 1594 1594 3 2000 0.7118 0 1424 1424 4 2000 0.6355 0 1271 1271 5 0.5674 0 0 0 6 0.5066 0 0 0 7 0.4523 0 0 0 8 0.4039 0 0 0 9 0.3606 0 0 0 10 0.3220 0 0 0 Aggregated Net Benefits 1610 TREATMENT - 2 Year Cost Benefit PV Factor @12% PV of Costs @12% PV of Benefits @12% PV of Net Benefits @12% (A) (B) (C) (D)=(A)x(C) (E)=(B)x(C) (E) - (D) 0 0 0 1.0000 0 0 0 1 5000 0 0.8929 4464 0 -4464 2 0.7972 0 0 0 3 0.7118 0 0 0 4 0.6355 0 0 0 5 0.5674 0 0 0 6 2000 0.5066 0 1013 1013 7 2000 0.4523 0 905 905 8 2000 0.4039 0 808 808 9 2000 0.3606 0 721 721 10 2000 0.3220 0 644 644 Aggregated Net Benefits -373Related Questions
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