Exam Of Economics - Assignment Example

Exam Of Economics Question 7. a. The graphs above show the changes in demand and supply as a result of the changes in the market. First, the reducedsupply of soybeans. Soybean is an essential ingredient in the making of Vitamin E supplements and a reduction in the supply of it marks automatically the reduction in Vitamin E supplements. This has led to a fall in the supply of Vitamin E as shown by the graph. Second, the scientific research has shown the ailments that can be ward off through the use of vitamin E. Such an information flow allows for an increased demand of vitamin E from people who might be suffering from the stated ailments like heart diseases, cancer or symptoms of aging. This has led to an increased demand for Vitamin E. b. As the graph above shows the shifts in demand and supply, there are changes in prices eventually. A fall in the supply of an ingredient of vitamin E that leads to a fall in the supply of vitamin E causes a rise in the rise. Similarly, for the second change, a rise in demand raises the price too. In all, there is less supply, more demand which allows for an increase in the overall price of vitamin E. c. As mentioned, there is a fall in the supply and a rise in demand. Thus, the suppliers raise the price and buyers continue buying despite the high price to fill in the demand. Then when the shortage is eliminated, the suppliers will cut back on the price rise for the vitamin E to be sold in the first case. For the second case as the demand will fall because the shortage is eliminated. The buyer's demand will reduce and they will not buy as much as they were before. d. If the given changes continue, the disequilibrium will get into equilibrium as shown by the graph below. The earlier disequilibrium due to the changes in the two cases will eventually fall into equilibrium. There will be an overall price rise and the initial e1, i.e. before the changes will shift to e2. Question 16. a. In the case, the average total cost is given for the inpatient services. The economic cost of a decision depends on both the cost of the alternative chosen and the benefit that the best alternative would have provided if chosen. The given ATC does not take into consideration the cost of the alternative, i.e. where else these costs could have been incurred instead of inpatient services example, for outpatient services. The given cost can represent the accounting cost but not the opportunity cost. Thus, the costs stated represent half of the economic costs. b. The graphical representation of the average total cost curve is shown below The graph above illustrates that the total average cost ATC for both the hospitals is the same. However, the total cost of the two hospitals varies. The reason is evident. The cost is directly proportional to the number of patients. As ACME hospital deals with 8000 more patients than Saving grace hospital, the cost of ACME produces at a higher cost. c. The reasons for the higher average cost of production for ACME hospital are: There might be higher variable costs for ACME Hospital. Inpatient services differ from patient to patient as per the requirement to overcome the given disease. This is higher will lead to a higher average total cost. There may be declining productivity that implies higher per unit cost. This is so because the average cost is inversely proportional to the productivity There may be higher average fixed costs, again may vary according to the output. The factor of diminishing returns is reflected in rising average cost. d. The sole basis of the comparison is to compare for profits. It is to see how much is the difference between revenues and costs for each hospital. Once, the assumption is removed, the comparative analysis will get muddled. There may be a possibility that the two hospitals operate on same fixed costs or the cost of charging patients may be the same. There will be no variable costs and only fixed costs will exist. Once that, the number of units (number of patients) will be a direct indicator of the profit and there will thus be no need for any comparative analysis. There will be no incentives to produce as cheaply as possible and thus, the two hospitals may operate above rather than the same cost curves. Question17. A. For a monopoly firm, the profit maximization output is the level of output at which the MR=MC. When AC=AR, Total revenue (TR) is maximum and MR=0. AC=AR 100=660-4Q Q=140 tablets Price 100 MC AC AR=D 140 MR Quantity TR=AR/Q (660-4Q)xQ=TR TR=$14000 y=mx+c (0,660) (140,0) m=-33/7 c=660 MR=-33/7x+660 MR=MC 100=-33/7x+660 x=119 tablets hence, if the monopoly wants to maximize its profits it will have produce 119 tablets. B. P=660-4Q =660-4(119) =$184 per tablet Profit earned=Per unit profit x Quantity =84x119 =$9996 C. Price Pm Ppc MC=D=AR AR=D QmQpc MR Quantity A profit maximizing monopoly firm operates at the level at which its MR=MC. As is seen from the graph above this level of output (Qm) will be less than the quantity produced in a competitive market (QPM) and the price charged (Pm) is also higher than in a competitive market (Ppc). This means that a monopoly firm will charge a price higher than its marginal cost (P>MC) which will result in an under-allocation of resources. The monopoly firm is not operating at its point of minimum AC which renders it productively inefficient. The idea that the absence of competitive pressure leads to organizational slack and increased costs is referred to as "X-inefficiency". This simply means that lack of competitive pressure results in costs per unit being higher under the monopoly. A lower output and higher price will result in a reduced consumer surplus or welfare to society. As shown in the above diagram the original consumer surplus under competitive market was ABC but under a monopoly, the consumer surplus has fallen to ADE. Of this, DBF is dead weight loss resulting from a fall in output which is lost to society. Social damages=areaBDEC =(84x119)+(1/2x(140-119)x84) =$10,878 D. Price Pm Ppc D=AR=MR (MC constant) D=AR QmQpc MR Quantity As seen from the above diagram the monopoly market is now a competitive market due to the removal of barriers to entry. These could have been artificial barriers or natural barriers e.g. high set up costs. This removal of barriers implies that there are now more firms in the market and competition will exist. As a result, we can see that the equilibrium will shift. The quantity will increase from Qm to QPC and the price will fall from Pm to Ppc as there is more competition in the market and the firms will look ways to reduce their prices by cutting costs. There will also be increased consumer surplus and hence it will become more efficient for the society. Question 18. The four-firm concentration ratio is used to determine the structure of a market by calculating the share of the four-largest firms in that market. In the data given to us we can see that the four firms with the highest number of admissions are Saving grace hospital (4000), Mercy me hospital (3000), Price plus hospital (1500), and Health R Us hospital (1500). Firms Number of admissions (in 000s) Market share (%) Saving grace hospital 4000 34 Mercy me hospital 3000 26 Price plus hospital 1500 13 Healthmart hospital 750 6 Health depot hospital 1000 8 Health R Us hospital 1500 13 Total 11750 100 According to the above data, we can see that the four-firm concentration ratio is coming out to be: 34+26+13+13=86% The concentration ratio of 86% is considered to be high-concentration which indicates that this market can be an oligopoly because the since these four firms are dominating the market. Another measure of determining the structure of a market is through finding the Herfindahl Hirschman Index (HHI) which helps in understanding the level of competition existing within a market. HHI = MS12 + MS22  + MS32  + MS42 …+ MSn2 Where MS=market share of the firms Firms Number of admissions (in 000s) Market share (%) MS2 Saving grace hospital 4000 34 1156 Mercy me hospital 3000 26 676 Price plus hospital 1500 13 169 Healthmart hospital 750 6 36 Health depot hospital 1000 8 64 Health R Us hospital 1500 13 169 Total (HHI) 11750 100 2270 As seen above the HHI is coming out to be 2270. This is considered to be moderately concentrated. This implies that the industry of hospitals can be categorized as an oligopolistic market since the concentration is moderate as a few firms hold the larger share of the market. Hence, all in all, we can conclude from the results of the two measures, the four-firm concentration ratio and the HHI, that this market can be categorized as an oligopoly since it is dominated by a small number of sellers and each firm is aware of the action of the other. Hence, there is interdependence between the firms. Works Cited: Santerre, R.E. Neun, S.P. (2010) Health Economics: Theories, Insights, and Industry Studies. Retrieved from,http://books.google.com.pk/books?id=naENL4kgpckC&pg=PA204&lpg=PA204&dq=how+does+short+run+average+cost+not+fully+represent+the+economic+cost&source=bl&ots=oghsxX-U28&sig=_rDPhWVaABIwEpEQeEH-bpAlP-0&hl=en&sa=X&ei=MlVsT9SjNYi38gPX6Om_DQ&ved=0CGgQ6AEwCQ#v=onepage&q=how%20does%20short%20run%20average%20cost%20not%20fully%20represent%20the%20economic%20cost&f=false Bamford, C. (2002) A Level and A Level Economics. Riley, G. College, E. (2006) A2 Markets and Market systems Short Run Costs. Website: http://tutor2u.net/economics/revision-notes/a2-micro-supply-short run-costs.html Chin, A. (2010). Herfindahl-Hirschman Index Calculator. Retrieved from http://www.unclaw.com/chin/teaching/antitrust/herfindahl.htm (2012). Four-Firm Concentration Ratio. Retrieved from http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=four-firm+concentration+ratio Read More