Diminishing marginal returns

1. Explain how the law of diminishing marginal returns is relevant when developing policies aimed at reducing the growth rate of healthcare expenditures.

2. Take a minute to think about the total expenditures of each patient at a hospital. What do you think the cost distribution will look like (large or small standard deviation; will there be a skew)? Will the median expenditures be larger than the mean? Why? Provide a 4-5 sentence explanation.

3. Imagine that our health status (measured by our overall utility level) was only determined by the amount of money that we spent on healthcare. At first, each additional dollar that we spend will increase our overall health. However, after we reach a certain amount of spending, our utility would actually start to decrease as we spend more and more. As an example, getting bloodwork is painful, and there is a chance I could get an infection or cold every time I go to the doctor’s office. Suppose that the health status can be calculated with the following function:U t i l i t y = 5 ⋅ s p e n d i n g − 0.0001 ⋅ s p e n d i n g 2

a. Create a graph to display the relationship between Health status and healthcare expenditures. I recommend using Excel for this. In one column, list the healthcare expenditures. Calculate the utility level for those amounts in the next column. Then, create an XY scatter plot using each of these columns to display the results. I have included a helpful hint at the bottom of this

b. What level of spending produces the maximum utility value?