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##### ECO -Two problems with Solution

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Question;1) Examine the analysis in Figure (up load a1) Suppose that;the hospital?s initial equilibrium price, P0, is \$10,000, the initial;equilibrium quantity is 1,000 procedures, and the initial marginal cost per;procedures, and the initial marginal cost per procedure is \$5,000;a) What is the initial profit level for the hospital?;b) If it costs \$500,000 in fixed costs to bring in a;consultant who will reduce marginal costs to \$4,500, what does the new average;cost curve look like?;c) Suppose that the hospital is given a yardstick price of;\$4,600, and it raises its production to 2,000 procedures. Assume that the;lump-sum subsidy is \$525,000. Calculate the following;i. Hospital?s profit or loss;ii. Increase in consumer surplus brought about by the;imposition of yardstick prices;2) Consider the analysis described in (up load 2a). Tom and;Dick each earn \$15,000 per year. Tom has a spouse and two children, and Dick is;unmarried. Health insurance and other goods trade off dollar for dollar (there;is no tax advantage to health insurance).;a) Where would each of the two be located on the budget;constraint, and why?;b) Which of the two would more likely take up a health;insurance program, such as Medicaid?;c) How would your answers to the first two parts change if;health insurance were subsidized (as it is) relative to all other goods?

Paper#56509 | Written in 18-Jul-2015

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