Question

Suppose the federal government is deciding the appropriate number of two cancer treatment therapies it will allow Medicare to funds to be used to pay for, Therapy A and B. Assume that $45 million has been allocated to pay for the two cancer therapies. Therapy A, which will prolong the average lifespan of patients receiving the treatment by 24 months, will cost $750,000 per treatment. Therapy B, which will prolong the average lifespan of patients receiving the treatment by 20 months, will cost $250,000 per treatment. Answer the following questions:

1. In terms of the number of treatments, what is the opportunity cost of Treatment A in terms of Treatment B when based on the dollar cost? (Show your work.)
2. In terms of the number of months of prolonged lifespan, what is the opportunity cost of Therapy A in terms of Therapy B when based on the number months of life gained? (Show your work.)
3. Assume all patients needing cancer treatment therapy can equally benefit as stated above from either Therapy A or Therapy B.   Further assume the only constraint is the Medicare funding. You can assume that the facilities to provide any level of treatments of either therapy already exist and further that there are a large number of cancer patients eligible for treatment and who qualify for treatment funding from Medicare.
   
   What is your personal recommendation for the optimal way the federal government should allocate the $45 million between Therapy A and Therapy B? Your answer will have two parts: 1) State your answer either as the number of treatments of each therapy that should be funded or the amount of money that should be spent on each therapy. 2) Explain what factors the federal government should consider in making this decision. You are encouraged to draw a production possibility curve diagram to help explain your analysis but are not required to do so.

Answer 1