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The domestic demand curve, domestic supply curve, and world supply curves for a good are given by the straight lines SDemand, SDomestic, and SWorld in Figure shown below. Assume first a regime of free trade and that imports are allowed. Then imports are banned. find out how consumer and producer surplus change because of the ban. Is the country better off with the ban on imports? Why?

1554_Demand supply curve.jpg

Part B:

Figure shown below shows the market for medical care by a hospital that enjoys a local monopoly services. Demand and marginal revenue are given respectively by the straight lines AB and AM. Marginal cost is constant and equal to Average total cost, as shown by the straight line CEF.

431_Local monopoly services.jpg

1. Assume that the hospital operates as a private enterprise maximizing profits. Show geometrically the maximum profit

2. The government then nationalizes the hospital and introduces a price ceiling set at the level GH (that is, the hospital is not allowed to charge a price higher than GH) as shown in the graph. Show the new equilibrium size of medical services and describe its characteristics, that is, profit / loss of the firm, excess demand / supply and how it can be sustained in the long-run.

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M91789

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