Consider the measurement of prices in the medical sector, where there is rapid innovation.Consider the case of a medical check-up for pregnant women. Assume that this service isprivately provided. Suppose that a new ultrasound method is introduced. In the first year thatthis new method is available, half of doctors offer the new method and half offer the oldmethod. Pregnant women frequent both doctors. A checkup using the new method costs 10%more than a check-up using the old one.1. In percentage terms, how much of a quality increase does the new method representcompared to the old method?Now suppose that in addition, in the first year the new method is offered, the price of check-ups with the new method is 15% higher than the price of check-ups in the previous year (wheneveryone used the old method).2. How much of the higher price of checkups using the new method reflects a true priceincrease and how much represents a quality increase? How much higher is the quality-adjusted price of check-ups using the new method compared to check-ups in theprevious year?Now suppose that in the year the new method is introduced, all doctors adopt the newmethod, and the old method is no longer offered. In addition, continue to assume that the priceof check-ups with the new method is 15% higher than the price of check-ups in the previousyear.3. Under these assumptions, what information required to compute the quality-adjustedprice increase of check-ups is lacking? Even without this information, can we sayanything about the quality-adjusted price increase of check-ups? Is it more or less than15%? Explain.

1. Suppose new ultrasound method for the medical checkup of pregnant is introduced in the first year…

Answered: Consider the measurement of prices in…

ENGR.ECONOMIC ANALYSIS

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Chapter1: Making Economics Decisions

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