1- Suppose XER Inc. is a monopoly and produces a drug that cures the common cold. The weekly marketdemand for its product takes the form P = 660/ 4Q, where Q is measured as number of tablets. Themarginal 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 e_cient levelof 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?
2- Suppose that an individual's demand for the number of physician visits per year, Q, can be representedby the following equation: P = 125 / 25Q, where P, the market price of an office visit, equals themarginal 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 healthinsurance coverage. How many times would this fully insured person visit the physician? Calculate thewelfare 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 impliesthat 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 conceptualframework provided by Nyman.
4- Explain the adverse selection that was observed at Harvard in 1995.
5- Suppose Joe and Leo both face the following individual loss distribution:
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Probability of Loss
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Amount of Loss
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0.7
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$0
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0,2
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$40
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0.1
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$60
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A. Determine the expected loss and standard deviation of the expected loss faced by Joe and Leo onan individual basis. Hint: There are 3 possible events.
B. Suppose that Joe and Leo enter into a pooling-of-losses arrangement. Show what happens to theexpected loss and standard deviation of the expected loss as a result of the pooling arrangement.
Hint: There are 9 possible events when they pool.
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Event
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Outcome
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Combined Probability
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Combined Loss
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Per-Person Loss
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1
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(0,0)
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0.7x0.7=0.49
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$0
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$0
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2
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3
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4
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5
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6
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7
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8
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9
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6- Reconsider the lemons model. Now suppose that there is no lemon. So, there are only 8 cars, withqualities: Or in other words, the mean quality is 1.125. In this case the marketdoes not disappear entirely and some cars actually get traded. Remember buyers are WTP $7,500 perquality unit, and sellers are WTS at $5,000 per quality unit. You might find filling out this table usefulin your analysis.
Determine the quantity of cars traded and the price at which cars get traded.
Quality WTP WTS