Suppose that in year one the only way to open clogged arteries is to do open hea

Question

Suppose that in year one the only way to open clogged arteries is to do open heart coronary artery
bypass surgery. In year two, however, coronary angioplasty is invented. This is a minimally invasive
procedure in which small wire mesh tubes called stents are used to widen the arteries in question from the
inside. The stents, mounted at the tip of catheters, are inserted through the skin into an artery and
advanced to the site of an arterial blockage where the balloon is inflated. Suppose we hire a researcher to
study the effectiveness of these two procedures and that he finds that both procedures are equally effective
at curing atherosclerosis. Patient recovery is, however, much faster in the case of angioplasty. The price of
open heart bypass surgery is $24,000 dollars in year one and $26,000 in year 2. The price of angioplasty
is $12,000 in year two and $13,000 in year 3. By year 3, no one uses bypass surgery anymore and
everyone instead chooses angioplasty. The BLS does not have access to the results of the study we
conduced and is therefore not able to assess the relative quality of bypass surgery and angioplasty. The
procedure they are therefore forced to adopt when measuring the rate of inflation in the cost of curing
atherosclerosis is to “link in” angioplasty, i.e., use the rate on inflation for bypass surgery between years 1 and 2 and the rate of inflation for angioplasty between years 2 and 3.
b) What is the true change in the cost of curing atherosclerosis between years 1 and 3?

Explanation / Answer

in year 1 atherosclerosis is cured by open heart bypass surgery whose cost is $24,000 in year 2 atherosclerosis when cured by open heart bypass surgery costs $26,000 and when cured by angioplasty cost $12,000 in year 3 atherosclerosis is cured by only angioplasty whose cost is $13,000 since in measuring the rate of inflation between years 1 and 2 the cost of curing atherosclerosis is measured by the rate of open heart bypass surgery and in in measuring the rate of inflation between years 2 and 3 the cost of curing atherosclerosis is measured by the rate of angioplasty so avg value of open heart bypass surgery between years 1 and 2 is (24000+26000)/2=$25000 whereas avg value of angioplasty between years 2 and 3 is (12000+13000)/2=$12500 therefore the true change in the cost of curing atherosclerosis between years 1 and 3 would be $25,000-$12500 = $12,500

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