The American Medical Association recently published a study on the benefits of woman taking folic ac Show more The American Medical Association recently published a study on the benefits of woman taking folic acid prior to pregnancy as a means to prevent several major birth defects.

The American Medical Association recently published a study on the benefits of woman taking folic ac Show more The American Medical Association recently published a study on the benefits of woman taking folic acid prior to pregnancy as a means to prevent several major birth defects.

Many insurance companies are now considering the potential long term cost savings from encouraging females age 16 and older to consume folic acid whether or not they are pregnant. As the economic consultant to the panel your job is to evaluate the cost effectiveness of various proposed remedies for Insurance Company ABC. For simplicity: Problems D EF H must have graphs. Assume that the only way to obtain an adequate amount of folic acid is to consume 400 mcg per day. Consider only a single low-income consumer who purchases some folic acid at the market price and who would purchase 400 mcg per day if either the price were low enough or income were high enough. This implies that initially these consumers are consuming less than 400 mcg per day. Assume all commodities are normal goods and our assumptions about preferences are satisfied. No one would ever bother taking more than 400 mcg per day regardless of income or price. The proposed remedies are: Plan A: Folic Acid price subsidies for the consumer. The low income consumer is given discount coupons that can only be used for folic acid. The discounted price is set exactly to lead to 400 mcg per day purchased. Plan B: Direct cash payments from insurance companies which can be used for any purchase. The low- income consumer receives the exact quantity of additional income which leads to 400 mcg per day purchased. Plan C: Folic Acid distribution. The company purchases 400 mcg per day and then gives it to the low- income consumer. Resale is prohibited. Hint: The initial bundle must include a consumption of less than 400 mcg of folic acid per day and the final bundle must include exactly 400 mcg of folic acid per day regardless of which program is used a. For Plan A what must be the direction of the substitution effect? Why? b. If folic acid is a normal good what is the direction of the income effect? c. If folic acid is an inferior good what is the direction of the income effect? (This is purely hypothetical since the problem states folic acid is a normal good.) DOOGS d. Show the income and substitution effects of Plan A. Like in class include an accounting of what has happened (the initial bundle the market shock se ie and the final bundle). Initially: Market Shock: Now: e. On a separate graph show the income effect of Plan B. (There is no substitution effect? Why?) Like in class include an accounting of what has happened (the initial bundle the market shock se ie and the final bundle). DOOGS Initially: Market Shock: Now: f. Which provides the low-income consumer with the highest utility: Plan A or Plan B? Justify your answer graphically. Hint: you will need to graph each policy together to determine your answer. DOOGS g. Which costs the Company more: Plan A or Plan B? Show your answer on your graph in part (f). Hint: to find the cost of Plan A find the line that represents an identical price ratio as BCo but a higher income level. (2 pts) mcgs per day DOOGS h. Which costs the Company more: Plan A or Plan C? Hint: you will need to graph each policy together to determine your answer. Hint: Plan C is a lot like our food stamps example from chapter 3. Show less

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