Health Economics: Market Dynamics and Government Intervention Effects

This assignment delves into various aspects of health economics, starting with an analysis of consumer utility maximization using indifference curves for alcohol and marijuana consumption, illustrating how changes in penalties (akin to price increases) affect consumer choices. It further examines market equilibrium shifts in the antihistamine and cosmetic surgery markets due to factors like production cost changes and increased disposable income, respectively. The assignment also addresses the impact of mandated tetanus vaccinations and government interventions like price capping on market dynamics, highlighting potential shortages. Finally, it touches upon the kidney transplant market, noting the persistent shortage due to high demand relative to supply. Desklib offers a wealth of similar solved assignments and study resources for students.

Running head: HEALTH ECONOMICS
Health Economics
Student’s name
Institution

1 (a) The figure below is an indifference curve showing a utility maximization problem for
consumers of alcohol and marijuana. The budget constraint is illustrated by line PL and hence
consumers have to optimize their consumers within the budget. Originally, the optimum
consumption of alcohol and marijuana are Y units and X units. The equilibrium point is
located at point e. At equilibrium point e, market demand and market supply are equal and
therefore exist no surplus or deficit.
Figure 1
(b) When government raised penalties for teenagers taking alcohol, a substitution effect
occurred due to increase in prices of alcohol (Dewett, 2015). Generally, individuals consume
more of a normal good at lower prices and less at higher prices. Consumption of alcohol

reduces to Y1 units while that of marijuana rises to X1. The new optimal consumption point
is e1 which is within the budget of the consumers.
Figure 2
3. (a) Figure 3 below shows the original equilibrium curve of antihistamine. The equilibrium
point is the point at which S1 and D1 intersect. At the equilibrium point, equilibrium quantity
is Q1 while equilibrium price is P1.

Figure 3: Market equilibrium curve of antihistamines
Figure 4: shift of demand curve
The decline in the price of antihistamines and increased demand might be as a result
of a decline in the cost of production. When cost of raw materials and labor reduce, sellers

might sell their products at lower cost. There is also a possibility that government has
subsidized the product lowering the selling price. The reduction in price motivates more
buyers to purchase antihistamine which is consistent with the law of demand.
(b) The rise in US economy increases the disposable income of individuals and their
propensity to consume. The increased consumption lead to the shift of cosmetic surgery
demand curve to the left leading to a higher market price and quantity demanded. The new
equilibrium price and quantity as indicated on figure 5 below are P2 and Q2 respectively.
Figure 5: Shift of demand curve of cosmetic surgery market
S
D
Q1
P1
Q2
(C) The reduction in quantity of prostate surgery led to led to the shift of the demand
curve to the left. The new equilibrium price and quantity are P2 and Q2 respectively which
are below the original equilibrium price P1 and quantity Q1. Figure 6 below shows the
demand and supply curves at equilibrium.
P2

Figure 6
S
D
Q1
P1
P2
Q2
4. (a)
The figure below shows the standard supply and demand curves for the tetanus
vaccine. The equilibrium point is at E. The equilibrium price and quantity are P1 and Q1
respectively.
S
D
Q1
P1 E

(b) When several states made compulsory the consumption of the tetanus vaccine, the
demand for the tetanus vaccine increased. The supply curve shifts to the left implying that
producers produced more to satisfy the demand gap (Friedman, 2015).
Figure 7
S
D
Q1
P1
P2
Q2
(c) The government’s action of construction more plants led to an increase in production of
the drug. The supply curve shifted to the left and hence price reduced. The reduction in price
concurs with the law of supply that states that price decreases when supply of a product is
high. The equilibrium price and quantity shifted from point P1 and Q1 to P2 and Q2
respectively.
.

Figure 8
S
D
Q1
P1
(d) Capping of prices below the equilibrium price leads to product shortage. When
government caps the price of tetanus drug at $2, producers would not be motivated to
produce while consumers demand more. The result of this is market inefficiency in from of a
shortage.
Figure 9
Q2
P2

5. The demand for kidney transplants is greater than its supply. This implies that is a shortage
for kidney for transplant. However, individuals are willing to sell their kidneys at higher
prices. The point shaded is the point of shortage.
Figure 10
R

References
Dewett, K. K. (2015). Modern Economic Theory (ME). S. Chand.
Friedman, M. (2017). Price theory. Routledge.