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A pharmaceutical company can produce each pill of a new drug at a constant marginal costgiven by MC = 5. Note that since the marginal cost is constant, then the average cost ofproducing pills is also 5. Inverse demand for the pills is given by P = 25 – Q and the company’smarginal revenue curve is thus given by MR = 25 – 2Q.
a) Suppose the company initially has market power and acts as a monopolist. How manypills will the company sell and what price will it charge consumers?
b) What are the consumer and producer surpluses when the company prices as amonopolist?
c) Suppose the government mandates that the company can only sell the pills at marginalcost (i.e. at P = 5). How many pills will the company sell?
d) What are the consumer and producer surpluses once the government mandate is in place?Consumer surplus is now area (A+B+C+D+E), a triangle with height and width of 20:CS =1/2* (20)*(20) = 200
e) Does the government pricing mandate satisfy the Kaldor-Hicks Criterion relative to thestatus quo? Is the government pricing mandate Pareto superior to the status quo? (Usechanges in consumer and producer surplus as your measures of the value of the policy tothese agents.)
The Medicare Payment Advisory Commission recently voted to suggested to Congress to institute a set of pay for performance incentives for providers serving Medicare patients.
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What role should our government play in Price Ceilings?
The scientific method is more difficult for economists than, say, chemists, because: a-controlled laboratory conditions are more problematic in economics. b-it is difficult to hold other factors that may affect the variables being studied constant in..
a. Demonstrate mathematically that ATC and AVC are not parallel. b. Show mathematically that when both ATC and AVC are falling, ATC falls faster than AVC, and when both are rising, AVC rises faster than ATC.
many economists feel the inflation rate is overstated. Analyze the impact of the overestimated inflation rate on the economy; be sure to mention which groups benefit and which groups are hurt by the inaccurate estimate of inflation
Identify and describe the four sources of unemployment and the four types of unemployment. For each type of unemployment, indicate if public policy can be used to reduce the incidence of that kind of unemployment, and if so, indicate what policies..
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