1.2.1 Assume that you are in the business of providing medical insurance. You have analyzed the market carefully, and you know that at a price of $6,000 per year, you will sell 40,000 insurance policies per year. In addition, you know that at any price above $6,000, no one will buy your insurance policies because the government provides equal-quality policies to anyone who wants one at $6,000. You also know that for every $1,000 you lower your price, you will be able to sell an additional 10,000 policies. For example, at a price of $5,000, you can sell 50,000 policies; at a price of

$4,000, you can sell 60,000 policies; and so on.

a. Sketch the demand curve that your firm faces.

b. Sketch the effective marginal revenue curve that your firm faces.

c. If the marginal cost of providing a health insurance policy is $5,000, how many will you sell and what price will you charge?
What if MC = $4,500 ?