1. Suppose XER Inc. is a monopoly and produces a drug that cures the common cold. The weekly market demand for its product takes the form P = 660 − 4Q, where Q is measured as number of tablets. The marginal costs (MC) are equal at $100 per tablet (a horizontal marginal cost curve).
(a) Given this information, solve for the level of output that will be produced by XER Inc. if it maximizes profits. Hint: remember you can calculate Marginal Revenue curve from demand curve.
(b) Solve for the price charged.
(c) From a societal point of view, does the profit-maximizing level of output represent an efficient level of output? Why or why not?
(d) Suppose the source of the entry barrier was removed so XER is no longer a monopoly. How would equilibrium change?
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2. Suppose that an individual’s demand for the number of physician visits per year, Q, can be represented by the following equation: P = 125 − 25Q, where P , the market price of an office visit, equals the marginal cost of $100. Determine the efficient number of office visits according to conventional theory (i.e. the number consumed without insurance). Now assume that the person purchases complete health insurance coverage. How many times would this fully insured person visit the physician? Calculate the welfare loss or moral hazard cost (area of the DWL triangle) associated with the insurance coverage. Hint 1: Remember efficiency is achieved at the competitive equilibrium. Hint 2: Full insurance implies that individual out of pocket costs are $0.
3. Graphically and in words, explain how the analysis in question 8 might change if we adopt the conceptual framework provided by Nyman.
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4. Explain the adverse selection that was observed at Harvard in 1995.
5. (Chapter 6 Q1) Suppose Joe and Leo both face the following individual loss distribution: Probability of Loss Amount of Loss
0.7 0.2 0.1
$0 $40 $60
(a) Determine the expected loss and standard deviation of the expected loss faced by Joe and Leo on an individual basis. Hint: There are 3 possible events.
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(b) Suppose that Joe and Leo enter into a pooling-of-losses arrangement. Show what happens to the expected loss and standard deviation of the expected loss as a result of the pooling arrangement. Hint: There are 9 possible events when they pool.
Event Outcome Combined Probability 1
2 3 4 5 6 7 8 9
Combined Loss Per-Person Loss $0
(0,0) |
0.7 × 0.7 = 0.49 |
$0 |
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6. Reconsider the lemons model. Now suppose that there is no lemon. So, there are only 8 cars, with
qualities: 1, 1, 3,1,11,11,13,2 . Or in other words, the mean quality is 1.125. In this case the market 424424
does not disappear entirely and some cars actually get traded. Remember buyers are WTP $7,500 per quality unit, and sellers are WTS at $5,000 per quality unit. You might find filling out this table useful in your analysis.
Determine the quantity of cars traded and the price at which cars get traded. This is going to be a step-by-step elimination process. Be sure I can see your work!
Quality WTP
WTS
Subject | General |
Due By (Pacific Time) | 04/08/2015 03:33 pm |
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