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(solution) ECON 514 Fall, 2015 Fourth Take Home Assignment Due Friday,


 Can you please look at 6D 6E 6F 6G. The part in bold is what I have completed. I will attach the document for supplemental information. 

6.         This monopolist was just granted a patent by the U.S Patent Office which gives him the

exclusive right to produce X.  The patent lasts forever..  Assume that the profit that you calculated in question 5f can be earned at the end of each year for the life of the patent and the interest rate is 5%.  This patent can be sold to another producer, who would then have the exclusive rights to product X.  All prospective buyers of this patent have the same production costs as our monopolist.

 

            a.         At what price would the patent sell? $2400  (120/.05)

 

            b.         Suppose that someone, person B, purchases the at the price determined in 6a.                                   How  much will it cost the patent buyer to own the patent for 1 year.  $2400

 

            c.         What will happen to this producer?s average total cost the first year of

                        production? Increase until , Leaving no economic profit

 

            d.         Draw this new average total cost curve in the monopoly graph.  Label it.

 

            e.         Having just bought the patent, how many units of X will the new

monopolist produce? ________

 

            f.          What price will the monopolist charge for X at the output rate you determined  in

                        e  ___

 

            g.         At the output rate determined in e, how much profit will he earn? _________


ECON 514

 

Fall, 2015

 

Fourth Take Home Assignment

 

Due Friday, December 11, at 5:00 p.m.

 

Universal Health Care (each question in this section is worth 10 points)

 

1.

 

Assume that there are certain things that you can do to reduce the probability that you

 

will want doctor or hospital services. These things include personal time and effort spent

 

planning and eating healthy food, taking vitamins, exercising, avoiding drinking and driving, and

 

just being careful with your health. The more time and effort that you allocate to your health, the

 

greater the probability that you will be healthy and not require professional medical care.

 

Draw a graph, labeling the horizontal axis ?probability that you will be healthy.? Starting at the

 

origin of the graph and moving to the right, the probability of good health will increase. The

 

vertical axis will measure the value of your health, measured in dollars.

 

a.

 

Assuming that the marginal value of an extra percent of health is diminishing as you get

 

healthier, draw a marginal value curve for your personal health. Label the curve.

 

b.

 

Draw in the graph above, a marginal cost curve for the production of ?health? assuming

 

that as you increase personal effort to obtain good health that your marginal cost will increase.

 

We would expect that each percent increase in the probability of personal health will cost more.

 

Label the curve.

 

c.

 

Using the graph you have just drawn, explain how a rational person would

 

choose how much personal health to produce __________________________

 

d. Will you choose to be ?as healthy as possible?? _______ Explain your answer.

 

_____________________________________________________________ 2.

 

The Congress of the U.S has approved a plan by which the Federal government will

 

make it mandatory that each and every citizen of the U.S. have health insurance. Assume that

 

the person whose behavior you have graphed above did not choose to purchase any health

 

care insurance when you drew your graph. Now this person will be given a Federal insurance

 

policy that will pay 90% of his medical bills if he/she should get sick or have an accident. Think

 

carefully how having this insurance policy will affect this person. The personal will allocate

 

less time and effort into being careful with their health because the cost they have to pay

 

if they get sick has shifted from 100 percent to 10 percent. This is an example of moral

 

hazard, or someone altering their actions to hurt the other party after an agreement was entered

 

into.

 

a.

 

In the graph you created for question 1, show the effect of this new health insurance on

 

this individual. Label any curve you change and explain why you did this.

 

____________________________________________________________ ____________________________________________________________

 

b.

 

Using your graph, explain how this insurance would affect the amount of personal effort

 

this individual would allocate to protecting his own health.

 

____________________________________________________________

 

____________________________________________________________

 

c.

 

Using your graph, explain what happens to the probability that this individual

 

will be using a doctor?s or a hospital?s services. ________________________

 

3. Actuaries (statisticians who deal with risk assessment) have been collecting data on how

 

frequently uninsured individuals go to a doctor or a hospital. Based upon their

 

observations,

 

these statisticians have estimated the cost of this government health care plan

 

a. What does economic theory predict will actually happen to the cost of this plan? _________________________________________________________________

 

b. According to your text, the change in behavior you hopefully discovered in your analysis

 

in the previous questions is called _______ Monopoly Closed Market (Each question in the next 2 sections is worth 10 points) Demand Price Production Costs Total Marginal

 

Quantity Revenue Revenue Quantity Fixed

 

cost Total

 

variable

 

cost 20 0 - MC Profit AVC ATC 0 0 3 7 27 6 25 6.5 16.5 18 5 46 6 12.7 20 22 4 66 5.5 10.5 5 20 27 5 83 5.4 9.4 20 6 20 33 6 97 5.5 8.8 168 18 7 20 40 7 108 5.7 8.57 8 184 16 8 20 48 8 116 6 8.50 22 9 198 14 9 20 58 10 120 6.4 8.6 21 10 210 12 10 20 70 12 120 7 9 0 0 - 0 30 1 30 30 1 20 7 7 29 2 58 28 2 20 13 28 3 84 26 3 20 27 4 108 24 4 26 5 130 22 25 6 150 24 7 23 20 11 220 10 11 20 84 14 116 7.6 9.5 19 12 228 8 12 20 100 16 108 8.3 10 18 13 234 6 13 20 118 18 96 9.1 10.6 17 14 238 4 14 20 138 20 80 9.9 11.3 16 15 240 2 15 20 161 23 59 10.7 12.1 15 16 240 0 16 20 187 26 33 11.7 12.9 14 17 238 -2 17 20 207 20 11 12.2 13.4 4.

 

The table above shows the demand for product X facing a monopolist and his

 

total fixed and variable costs for each quantity produced in one year. As always, assume that

 

when indifferent, the producer will produce the marginal unit.

 

a.

 

Complete the table above and then draw a graph showing this producers

 

average variable cost, average total cost, marginal cost, demand and marginal revenue

 

b. What is the coefficient of price elasticity for the demand curve between the prices

 

$18 and $17? 1/13.5 / 1/17.5 = 1.30 c. What is the coefficient of price elasticity for the demand curve between the prices

 

of $16 and $15? 1/15.5 / 1/15.5 = 1 d. What is the coefficient of price elasticity for the demand curve between the prices

 

of $15 and $14? 1/16.5 / 1/14.5 = 0.88 e. Why would a monopolist, or any price searcher, never produce where the

 

coefficient of price elasticity for the demand curve for his product is less than 1?

 

Marginal revenue is negative and no one will produce an extra unit when it means

 

they will lose money.

 

5.

 

Back to our monopolist shown in the table above;

 

a.

 

Assuming that this monopolist produces X, how many units would he

 

choose to produce? 10 units

 

b. At the output rate chosen in a, what would be his total cost? 90 c. Show the total cost from b in the graph you drew. d. At the output rate chosen in a, what would be his total revenue? 210 e. Show the total revenue in the graph you drew. f. At the output rate chosen in a, what would be his total profit? 120 g. Show his total profit in the graph you drew. 6.

 

This monopolist was just granted a patent by the U.S Patent Office which gives him the

 

exclusive right to produce X. The patent lasts forever.. Assume that the profit that you

 

calculated in question 5f can be earned at the end of each year for the life of the patent and the

 

interest rate is 5%. This patent can be sold to another producer, who would then have the

 

exclusive rights to product X. All prospective buyers of this patent have the same production

 

costs as our monopolist.

 

a. At what price would the patent sell? $2400 (120/.05) b. Suppose that someone, person B, purchases the at the price determined in 6a.

 

How much will it cost the patent buyer to own the patent for 1 year. $2400 c. What will happen to this producer?s average total cost the first year of

 

production? Increase until ATC=Price, Leaving no economic profit d. Draw this new average total cost curve in the monopoly graph. Label it. e.

 

Having just bought the patent, how many units of X will the new

 

monopolist produce? ________

 

f. What price will the monopolist charge for X at the output rate you determined in

 

e ___ g. At the output rate determined in e, how much profit will he earn? _________ Monopolist, Open Market

 

7.

 

There is usually something that keeps potential competitors out of a profitable

 

market. Very often, this ?barrier? to entry is created by the government. In our example in the

 

previous questions, the barrier was a patent. Suppose this patent has now expired and anyone

 

can enter the market and produce and sell product X.

 

a. There are other potential producers of X who have the same production costs as

 

our monopolist. As these potential producers are attracted into the market by the

 

profit, what happens to the market price of X? Price will decrease as more

 

producers join the market

 

b.

 

At what point will entry stop? When no profit is to be gained- Their opportunity cost

 

is higher elsewhere.

 

c. If so many new producers enter this market that each one is a price taker, what

 

price would we expect in the long run for product X? _________ Property Rights (each question in this section is worth 5 point) There is a hog farmer located out in the country outside of West Lafayette. There is an odor

 

that comes from the farm and blows downwind to a nearby resident. The odor increases with

 

the number of hogs raised by the farmer. This odor is unpleasant and the bad smell imposes

 

harm on the resident, although the hog farmer does not even notice the smell. There are no

 

other neighbors to the hog farm that are affected by the odor. Of course, it costs the farmer

 

nothing to produce the odor. The table below shows the total value of the hogs to the farmer

 

(total profit from producing and selling the hogs) and the total value of the harmful effects of the

 

odor on the resident.

 

Numb

 

er of Total value

 

to the farmer Marginal

 

value to the Total

 

value of Marginal

 

value of Hogs farmer 0 0 1 the harm

 

to the

 

resident the harm to

 

the

 

resident - 0 - 1500 1500 0 0 2 2900 1400 0 0 3 4200 1300 84 84 4 5450 1250 206 122 5 6670 1220 395 189 6 7820 1150 642 247 7 8938 1118 930 288 8 10029 1091 1242 312 9 11089 1060 1607 365 10 12116 1027 2022 415 11 13116 1000 2497 475 12 14098 982 3007 510 13 15063 965 3593 586 14 15999 936 4213 620 15 16899 900 4865 652 16 17770 871 5565 700 17 18618 848 6321 756 18 19427 809 7131 810 19 20219 792 8026 895 20 20739 520 8996 970 21 20954 215 10096 1100 22 20956 2 11596 1500 23 20834 -122 13596 2000 8.

 

In the absence of any government intervention and no exclusive property rights for the

 

right to create bad smells,

 

a. how many hogs would the farmer choose to produce? 22 b.

 

-122 given your answer in part a, what is the marginal value of one more hog to the farmer? c. given your answer in part a, what is the total value of the hogs to the farmer? 20,956 9.

 

a.

 

11,596

 

b. given your answer in part 8a, what is the total value of the harm to the resident? What is the private cost to the hog farmer of producing the odor? 0 c.

 

Given your answer in part 9a and b, what is the total value of the externality created by

 

the hog farmer?.11,956

 

10.

 

Suppose the local government did not create and assign the exclusive and transferable

 

rights to make bad smells. Instead they passed a law that would only allow the farmer to raise a

 

certain number of hogs.

 

a.

 

If the government wanted to minimize the harmful effects of the odor on the resident, as

 

measured by the values of the resident, how many hogs would the farmer be allowed to raise?

 

18

 

b.

 

Given your answer in 10a, how much total harm would this law impose on the hog

 

farmer?

 

It would decrease total harm by 4,465 (11,596- 7131) as 18 hogs would be raised instead

 

of 22.

 

11.

 

Since harm is ?reciprocal,? the city?s hog law may have reduced the harm done to the

 

resident, but it simultaneously increased the harm to the farmer. The city government now

 

changes its policy. It now wants to allow the farmer to raise the number of hogs that will

 

minimize the total harm that both the resident and the farmer do to each other.

 

a. How many hogs would the government allow the farmer to raise? _____ b. Given your answer in 11a, how much total harm does this impose on the resident? ___ c. Given your answer in 11a, how much harm did the law impose on the farmer? _______ d.

 

Given your answer in 11a, how much total harm did these two individuals impose on

 

each other? __________

 

e.

 

Prove that your answer in 11a is the number of hogs that minimizes the total harm they

 

do to each other. _________________________________________

 

12. If the resident was given the exclusive (but not transferable) rights to create odors, a. how many hogs would he allow the farmer to produce? ______ b.

 

given your answer in 12a, what is the total value of the harm done to the farmer?

 

_________________________

 

c.

 

given your answer in 12a, what is the private cost to the resident of limiting number of

 

hogs? ___

 

d.

 

given your answer in 12a, what is the total value of the externality created by the

 

resident in part 9a? __________

 

13. If the farmer was given the exclusive and transferable rights to create odors, a. how many hogs would he choose to produce? _____ b.

 

Given your answer in 13a, what is the total harm this imposes on the resident?

 

___________

 

c.

 

____ Given your answer in 13a, what is the private cost to the farmer of producing the hogs? d.

 

Given your answer in 13a, what is the total value of the externality imposed on the

 

resident? ___________________

 


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