Skeleton notes #4 part 2 Flashcards
Bob is trying to decide to become a surgeon or a sports star. If he is a surgeon his t0 = -5, t1 = 1, t2 = 13, t3 = 15. If he’s a sports star his t0 = 20, t1 = 3, t2 = 0, and t3 = 0. Bob’s discount factor is δ = 0.95. Should Bob be a surgeon or a sports star?
Surgeon:
.95^0 (-5)+.95^1 (1)+.95^2 (13)+.95^3 (15) = 20.5
Sports Star:
.95^0 (20)+.95^1 (3)+.95^2 (0)+.95^3 (0) = 22.85
Bob should be a sports star
If npv for surgeon is 20.5, and npv for sports star is 22.85, should you go to medical school or no?
No med school
What can we do to incentivize going to medical school instead of being a sports star?
Lower cost of medical school, increase B or δ
What is the Internal Rate of Return (IRR)?
The discount factor or rate that would make a person indifferent to the choice of investments/careers
IRR Factor δ*
IRR Rate r*
How do we calculate the IRR (internal rate of return)?
We set the npv equation for one decision equal to the other.
ex:
npv surgeon = npv sports star
δ^0 (t0) + δ^1 (t1) + δ^n (tn) = δ^0 (t0) + δ^1 (t1) + δ^n (tn)
Bob is trying to decide to become a surgeon or a sports star. If he is a surgeon his t0 = -5, t1 = 1, t2 = 13, t3 = 15. If he’s a sports star his t0 = 20, t1 = 3, t2 = 0, and t3 = 0. What is Bobs IRR?
npv Surgeon:
δ^0 (-5)+δ^1 (1)+δ^2 (13)+δ^3 (15)
npv Sports Star:
δ^0 (20)+δ^1 (3)+δ^2 (0)+δ^3 (0)
Set equal
δ^0 (-5)+δ^1 (1)+δ^2 (13)+δ^3 (15) = δ^0 (20)+δ^1 (3)+δ^2 (0)+δ^3 (0)
δ^0 (-25)+δ^1 (-2)+δ^2 (13)+δ^3 (15)
Putting into google or graphing calculator using x for δ
δ* = 0.985
Paula is considering law school. She would spend $60,000 on tuition and books to get a college education (t=0), $120,000 on tuition and books to get a law degree (t=1), and her law degree will benefit her $620,000 during the remainder of her work-life (t=2). Paula’s time preference is associated with a per-period discount factor of 0.83. What is Paula’s npv? Should Paula go to law school?
find npv
δ =0.83
0.83^0 (-60,000)+0.83^1 (-120,000)+0.83^2 (620,000) =
=$268,000
Paula should go to law school
While__________________ compares costs vs. benefits in net-present value dollar terms, ___________________ puts the effects of a treatment or program in terms of health effects to identify which ______________ help the most people for a given dollar investment.
cost benefit analysis (CBA)
cost effectiveness analysis (CEA)
treatments/programs
We use a concept of _______________ to measure the effects of a treatment that possibly has __________.
Quality Adjusted Life Years
side effects
The year of gained life is _______ by the downgrade by the _______ of life.
offset
quality
Typically, economists administer survey intruments to a sample of people in order to estimate a group of people’s _______________.
collective quality adjustment
What are the 3 ways economists measure quality of life tradeoff?
Visual Analogue
Standard Gamble
Time Tradeoff
___________________ : easy survey instrument to “grade” various ailments and their health state. However, this does not reflect one’s intensity of __________, nor does it insist that one decide when facing a tradeoff.
visual analogue
preferences
_____________ :this requires the survey-taker to choose between a certain state of health (i.e. with a side-effect or ailment) and a gamble between ________ and _______. Since people are risk averse, they may say they prefer _________ health states when they actually don’t.
Standard Gamble
Perfect health
death
diminished
