Problem set

NAME (first and last):

ECON 352: Problem Set 3 Professor. Priti Kalsi Due Date: Tuesday March 29th at the beginning of class

1. Use supply and demand models to illustrate how the following changes would a↵ect the demand curve or

the supply curve for inpatient services at a hospital in a large city. Be sure to label old and new

curves (D1=old demand, D2= new demand, S1=old supply, and S2=new supply). What is the impact

on price (increase/decrease) and quantity (increase/decrease)?

(a) Average real income in the community increases.

(b) A number of physicians in the area join together and open up a discount-price walk-in clinic.

Suppose physician services and inpatient hospital services are complements.

(c) Suppose the hospital building goes through a renovation.

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2. Using supply and demand analysis, show graphically and explain in words some of the factors that may

have led to rising health care pices in the United States from 1960s to the present day.

3. Suppose demand curve is given by P = � 1

10

Q + 10 and the supply curve is given by P = 1

10

Q + 2.

P denotes Price and Q denotes Quantity.

(a) Graph both the supply and demand curves.

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(b) What is the equilibrium price and quantity (P and Q)?

(c) Calculate consumer surplus. Shade appropriate area in graph.

(d) Calculate producer surplus. Shade appropriate area in graph.

(e) Calculate total surplus.

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4. Suppose XER Inc. is a monopoly and produces a drug that cures the common cold. The weekly market

demand for its product takes the form P = �4Q + 660, where Q is measured as number of tablets. The marginal 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. 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 level

of output? Why or why not?

(d) Suppose the source of the entry barrier was removed so XER is no longer a monopoly. What will

be the new equilibrium?

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