These questions are based on the reading in:
Stokey, E. & Zeckhauser R. (1978). A primer for policy analysis. New York City: W.W. Norton & Co.Question 1 (DIFFERENCE EQUATION)
In the year 2000, the Congressional Budget Office offered the following estimates regarding Medicare (the U.S. government program that pays for part of the health costs of individuals who are permanently disabled or over 65 years old):
• Medicare would begin partial coverage for prescription drugs in 2003
• In 2003, the total cost of prescription drugs for those on Medicare would be $48 billion
• The cost of prescription drugs was projected to rise at 12% a year
• Medicare would pay $400 billion over the 10-year period from 2003-2012 for the prescription drug benefit
a. What fraction of the total prescription drug cost over the 10 years would be covered by the new $400 billion prescription drug benefit?
b. Assuming the fraction of the total, found it part (b), would be constant over each of the 10 years, how much would have been paid by Medicare on drugs in 2003?
c. Is your answer to part (c) a lot of money? Provide a brief explanation as to why it may be considered a lot of money, and a brief explanation as to why it may NOT be viewed as a lot of money.
Difference Equation example: a financial system
. Imagine you have a financial investment that grows annually by 5% in any given year. At the last moment of each year, you must pay the manager of this investment a $1,500 fee. What happens to the system over time? How does the tendency of this system differ than if you were to pay the fee at the beginning of the year?
Difference Equation example: welfare-to-work
Assume that a welfare-to-work system has funds to provide financial support to a fixed number of individuals who cannot find work (call that number n). What are the elements of inflow and outflow from this system? That is, why do people enter or exit a welfare program? What is the role of policy in terms of entrance and exit, and how does the policy relate to the system’s equilibrium value?