02 Jun Question 1) Examine the analysis in Figure (up load a1
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?
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