MHA710 | MHA710 Healthcare Economics Exam 1
v1 | Questions with Correct Answers and Expert
Explanation for Each Question | Louisiana State
University in Shreveport
1. In healthcare economics, what is the concept of opportunity cost?
A. The total monetary cost of a medical procedure.
B. The subsidy provided by the government to lower patient costs.
C. The value of the next best alternative foregone when a choice is made.
D. The overhead costs associated with running a hospital facility.
Correct Answer: C
Expert Explanation: Opportunity cost is a fundamental economic principle representing
the benefits an individual, investor, or business misses out on when choosing one
alternative over another. In healthcare, this could mean the resources spent on one
treatment program that are no longer available for another program. Understanding this
helps administrators allocate scarce resources more efficiently across competing needs.
2. Which of the following best describes the production function of health?
A. The supply chain management of medical supplies in a clinic.
B. The financial accounting of hospital revenues and expenses.
C. The bureaucratic process of approving new pharmaceutical drugs.
D. The relationship between medical inputs and the resulting health status.
Correct Answer: D
Expert Explanation: The production function of health illustrates how various inputs,
such as medical care, diet, and exercise, contribute to an individual’s health outcome.
Economists use this model to determine the marginal productivity of medical care relative
to other factors. It emphasizes that medical care is only one of several factors that
determine health status.
3. According to the law of diminishing marginal returns in healthcare, as more medical care is
consumed:
A. Health status continues to increase at an increasing rate.
B. The additional gain in health status from each unit of care eventually decreases.
C. Health status begins to decrease immediately.
,D. The cost of each unit of medical care automatically goes down.
Correct Answer: B
Expert Explanation: Diminishing marginal returns suggest that as more resources are
applied to a specific health issue, the incremental benefit derived from each additional unit
of care declines. For example, while the first few days of hospital recovery provide
significant benefits, staying for a 30th day may offer very little additional health
improvement. This concept is crucial for determining the optimal level of care that avoids
waste.
4. In the Grossman Model, health is viewed as:
A. A capital stock that yields utility and depreciates over time.
B. A consumption good only, providing immediate pleasure.
C. A purely random occurrence that cannot be influenced.
D. A public good that the government must provide for free.
Correct Answer: A
Expert Explanation: Michael Grossman’s model treats health as a durable capital stock
that generates ‘healthy time’ for both work and leisure. Individuals ‘invest’ in health
through medical care and lifestyle choices while it ‘depreciates’ as they age. This
perspective allows economists to analyze health as a choice involving investment and
consumption motives.
5. What happens to the demand for medical care if it is considered a ‘derived demand’?
A. People demand medical care because they enjoy the process of surgery.
B. The demand is forced upon consumers by government mandates only.
C. The demand is derived solely from the supply of hospital beds.
D. The demand is derived from the underlying demand for health itself.
Correct Answer: D
Expert Explanation: Derived demand means that consumers do not usually want medical
services for their own sake, but rather for the health improvements they provide. Patients
seek out doctors and treatments because they value the ‘health’ produced by those
interactions. This distinction is vital for understanding why price sensitivity might vary
based on the perceived health benefit.
6. Which factor would typically cause a shift in the demand curve for healthcare rather than a
movement along it?
A. A change in the health insurance coverage of the population.
B. A change in the price of the specific medical service being measured.
, C. A decrease in the cost of medical supplies used by the doctor.
D. The introduction of new medical technology that lowers production costs.
Correct Answer: A
Expert Explanation: A change in insurance coverage changes the out-of-pocket price for
the consumer at every price point, which shifts the demand curve. A movement along the
curve occurs only when the price of the service itself changes. Other factors shifting
demand include changes in income, preferences, or the prices of substitute treatments.
7. If the price elasticity of demand for a specific heart medication is -0.2, the demand is
considered:
A. Perfectly elastic
B. Inelastic
C. Unitary elastic
D. Elastic
Correct Answer: B
Expert Explanation: Price elasticity of demand measures how much the quantity
demanded changes in response to a change in price; a value between 0 and -1 is considered
inelastic. An elasticity of -0.2 suggests that consumers are not very sensitive to price
changes for this medication. This often occurs with life-saving treatments where patients
have few alternatives and must continue treatment regardless of price.
8. The RAND Health Insurance Experiment demonstrated that:
A. Cost-sharing reduces the use of both effective and ineffective care.
B. Free care results in significantly better health outcomes for everyone compared to cost-
sharing.
C. People with free care use the same amount of services as those with high deductibles.
D. Health insurance has no impact on the utilization of medical services.
Correct Answer: A
Expert Explanation: The RAND experiment was a landmark study showing that as the
level of cost-sharing increases, the utilization of medical services decreases. Interestingly,
the study found that patients reduced their use of both high-value and low-value care in
response to higher prices. This finding suggests that price is a powerful but blunt tool for
controlling healthcare spending.
9. Moral hazard in health insurance occurs when:
A. Patients engage in riskier behavior or use more care because they are insured.
B. Insurance companies refuse to cover high-risk individuals.
v1 | Questions with Correct Answers and Expert
Explanation for Each Question | Louisiana State
University in Shreveport
1. In healthcare economics, what is the concept of opportunity cost?
A. The total monetary cost of a medical procedure.
B. The subsidy provided by the government to lower patient costs.
C. The value of the next best alternative foregone when a choice is made.
D. The overhead costs associated with running a hospital facility.
Correct Answer: C
Expert Explanation: Opportunity cost is a fundamental economic principle representing
the benefits an individual, investor, or business misses out on when choosing one
alternative over another. In healthcare, this could mean the resources spent on one
treatment program that are no longer available for another program. Understanding this
helps administrators allocate scarce resources more efficiently across competing needs.
2. Which of the following best describes the production function of health?
A. The supply chain management of medical supplies in a clinic.
B. The financial accounting of hospital revenues and expenses.
C. The bureaucratic process of approving new pharmaceutical drugs.
D. The relationship between medical inputs and the resulting health status.
Correct Answer: D
Expert Explanation: The production function of health illustrates how various inputs,
such as medical care, diet, and exercise, contribute to an individual’s health outcome.
Economists use this model to determine the marginal productivity of medical care relative
to other factors. It emphasizes that medical care is only one of several factors that
determine health status.
3. According to the law of diminishing marginal returns in healthcare, as more medical care is
consumed:
A. Health status continues to increase at an increasing rate.
B. The additional gain in health status from each unit of care eventually decreases.
C. Health status begins to decrease immediately.
,D. The cost of each unit of medical care automatically goes down.
Correct Answer: B
Expert Explanation: Diminishing marginal returns suggest that as more resources are
applied to a specific health issue, the incremental benefit derived from each additional unit
of care declines. For example, while the first few days of hospital recovery provide
significant benefits, staying for a 30th day may offer very little additional health
improvement. This concept is crucial for determining the optimal level of care that avoids
waste.
4. In the Grossman Model, health is viewed as:
A. A capital stock that yields utility and depreciates over time.
B. A consumption good only, providing immediate pleasure.
C. A purely random occurrence that cannot be influenced.
D. A public good that the government must provide for free.
Correct Answer: A
Expert Explanation: Michael Grossman’s model treats health as a durable capital stock
that generates ‘healthy time’ for both work and leisure. Individuals ‘invest’ in health
through medical care and lifestyle choices while it ‘depreciates’ as they age. This
perspective allows economists to analyze health as a choice involving investment and
consumption motives.
5. What happens to the demand for medical care if it is considered a ‘derived demand’?
A. People demand medical care because they enjoy the process of surgery.
B. The demand is forced upon consumers by government mandates only.
C. The demand is derived solely from the supply of hospital beds.
D. The demand is derived from the underlying demand for health itself.
Correct Answer: D
Expert Explanation: Derived demand means that consumers do not usually want medical
services for their own sake, but rather for the health improvements they provide. Patients
seek out doctors and treatments because they value the ‘health’ produced by those
interactions. This distinction is vital for understanding why price sensitivity might vary
based on the perceived health benefit.
6. Which factor would typically cause a shift in the demand curve for healthcare rather than a
movement along it?
A. A change in the health insurance coverage of the population.
B. A change in the price of the specific medical service being measured.
, C. A decrease in the cost of medical supplies used by the doctor.
D. The introduction of new medical technology that lowers production costs.
Correct Answer: A
Expert Explanation: A change in insurance coverage changes the out-of-pocket price for
the consumer at every price point, which shifts the demand curve. A movement along the
curve occurs only when the price of the service itself changes. Other factors shifting
demand include changes in income, preferences, or the prices of substitute treatments.
7. If the price elasticity of demand for a specific heart medication is -0.2, the demand is
considered:
A. Perfectly elastic
B. Inelastic
C. Unitary elastic
D. Elastic
Correct Answer: B
Expert Explanation: Price elasticity of demand measures how much the quantity
demanded changes in response to a change in price; a value between 0 and -1 is considered
inelastic. An elasticity of -0.2 suggests that consumers are not very sensitive to price
changes for this medication. This often occurs with life-saving treatments where patients
have few alternatives and must continue treatment regardless of price.
8. The RAND Health Insurance Experiment demonstrated that:
A. Cost-sharing reduces the use of both effective and ineffective care.
B. Free care results in significantly better health outcomes for everyone compared to cost-
sharing.
C. People with free care use the same amount of services as those with high deductibles.
D. Health insurance has no impact on the utilization of medical services.
Correct Answer: A
Expert Explanation: The RAND experiment was a landmark study showing that as the
level of cost-sharing increases, the utilization of medical services decreases. Interestingly,
the study found that patients reduced their use of both high-value and low-value care in
response to higher prices. This finding suggests that price is a powerful but blunt tool for
controlling healthcare spending.
9. Moral hazard in health insurance occurs when:
A. Patients engage in riskier behavior or use more care because they are insured.
B. Insurance companies refuse to cover high-risk individuals.
