MC 207 – CS AND PS Price Controls for Medical Care

Subject: Economics / General Economics Question
CS AND PS

You are willing to pay $2,000 to have your house painted. The painter’s marginal cost is $1,400. If you agree to split the difference on price, what is your consumer surplus? The painter’s producer surplus?

Suppose your neighbor is willing to pay $1,300 for a painted house. Would his house be painted?

CS AND PS

Price Controls for Medical Care. Consider a town where the equilibrium price of a doctor’s visit is $60 and the equilibrium quantity supplied is 90 patient visits per hour. For suppliers (doctors), each $1 increase in price increases the quantity supplied by two visits. For consumers, each $1 increase in price decreases the quantity demanded by one visit. Suppose that in an attempt to control the rising costs of medical care the government imposes price controls, setting a maximum price of $50 per visit.

Use a completely labeled graph to show the effects of the maximum price on (a) the quantity of visits to doctors and (b) the total surplus of the market.
PRODUCTION COSTS

Compute the Short-Run Costs. Consider a firm with the following short-run costs:
What is the firm’s fixed cost?
Compute short-run marginal cost (MC), short-run average variable cost (AVC), and short-run average total cost (ATC) for the different quantities of output.
Draw the three cost curves. Explain the relationship between the MC curve and the ATC curve and the relationship between the AVC curve and the ATC curve.
Quantity

Variable Cost (VC)

Total Cost (TC)

Marginal Cost (MC)

Average Variable Cost (AVC)

Average Total Cost (ATC)

1

$?30

$?90

2

50

110

3

90

150

4

140

200

5

200

260

PURE COMPETITION

A purely competitive firm sells trinkets for $10 each and has the following cost structure: Fixed costs are $2, and each unit produced adds ($2 ^ quantity) of variable costs Calculate the total and marginal costs. What the is profit maximizing level of output?

Suppose instead that the same firm above had fixed costs of $10. Would the firm be profitable or unprofitable? In the short run, will the firm shut down or keep operating? In the long run, what would the firm do?

MONOPOLY

Consider the Slappers, a hockey team that plays in an arena with 8,000 seats. The only cost associated with staging a hockey game is a fixed cost of $6,000: The team incurs this cost regardless of how many people attend a game. The demand curve for hockey tickets has a slope of –$0.001 per ticket ($1 divided by 1,000 tickets): Each $1 increase in price decreases the number of tickets sold by 1,000. For example, here are some combinations of price and quantity:

Price per ticket

$4

$5

$6

$7

Quantity of tickets

8,000

7,000

6,000

5,000

The owner’s objective is to maximize the profit per hockey game (total revenue minus the $6,000 fixed cost).

What single price will maximize profit?
If the owner picks the price that maximizes profit, how many seats in the arena will be empty? Why is it rational to leave some seats empty?
MONOPOLY

Draw a graph showing a monopolists price, output and profits, and label the deadweight loss. (No numbers required)

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