Expert: Rohit Agarwal - 10/23/2007

Question
Sars a communicable disease, is becoming increasingly prevalent in major portions of the world (except for North America, where it is relatively well contained. On average, each new case of Sars in this country costs approximately 500,000 to contain and treat.

Your boss, the Director of US Immigration Services, has asked you to analyze the economic affect of restricting immigration in order to stem the tide of this dreaded disease, either by closing our borders completely or by requiring immigrants to be tested for the disease prior to admission to the US (Or by continuing the status quo).

Just the facts?
*Approximately 12% of potential immigrants have the disease.

* The Williams Institute of Economics estimates that,on average, immigrants who don't have the disease contribute $75,000 to the economy after they arrive.

*The test for Sars yields either a positive or a negative. An individual who does have the disease will test negative 35% of the time.

Question 1: what is the best policy for the government to adopt ( from an economic perspective)? Why?

Question 2: What is the most the government should be willing to spend to administer the test?

Question 3: Now suppose the test was 100% accurate ( there are no longer false negatives) What should the government be willing to spend to administer the test?

Answer
1. Let us assume that 100 immigrants are planning to settle in the US. 12 of them have the disease. Let all of them test for SARS once. Out of these 12, tests on only 8 will show the presence of SARS, so they need to be banned from entering. So, the rest 92 (4 infected and 88 pure) will enter the country. So, the 88 pure immigrants go on and contribute $6600000 to the economy. However, the 4 infected cost $2000000 to contain and treat. So, eventually, the economy grows by $4600000. The govt should follow this policy.
2. The country should be willing to spend a maximum of $46000 per test.
3. Now, I hope you can solve the 3rd part by yourself.