In the market for health care, the price P is set by outside forces rather thanbeing negotiated between consumers and producers. Consumers as a whole havea shared marginal value curve M V,which is a function of Q. Producers have ashared marginal cost curve MC, which is a function of Q.

a . For some given P, what should consumers do to maximize consumer surplus?b. For some given P, what should producers do to maximize producer surplus?c. What would it mean for the market for health care to be efficient?

d . How could those outside forces set P to make the market efficient?

B. In the market for wallets, which is competitive and made up of many thousands of wallet makers, the inverse supply curve is P = 5 + 2Q5. Graph this supply curve.

Then, consider Ari, Barry, and Carrie. Each makes only one wallet. It costs Ari

$13 to make her wallet; Barry’s costs are $21, and Carrie’s costs are $33. Label the three points on the supply curve that represent Ari, Barry, and Carrie.

C. Give an intuitive explanation of what deadweight loss is. Your explanationshould probably refer to some sort of surplus as well as the “efficient quantity”and the “actual quantity.”

D. A well-known economic puzzle is the “water and diamonds paradox.” Water, vital to life, is cheap. But diamonds, mostly useless, are expensive. Consider a marginal value function for water of MV = 120 — QW, and assume that theconsumption of water is QW= 110 units, with a marginal value function for diamonds of MV = 40 — 2QD, and assume that the consumption of diamonds isQD= 3 units. Explain how this resolves the paradox.

E. Consider the demand curve on the Price“

right. Calculate the total value (not 21 the marginal value!) produced by 18 n I this good at the quantities of Q = 1, :

Q=3,andQ=

F. You are considering how many hours per day to spend at work. Every hour youspend at work, you get paid a wage of $60. However, this is also an hour you must spend away from your family.Your marginal value of the first hour you spent withyour family every day (i.e. what you lose if you change from 23 hours of work per day to 24) is $240. The marginal value of the second hour you spend with your family (what you lose if you change from 22 hours of work to 23) is $230, themarginal value of the third hour you spend with your family is $220, and so on.

a. Describe what the marginal cost and marginal benefit of working are.

b. Calculate how many hours you should work.

c. Explain why we can think of a marginal value (what you get from spendingtime with your family) as a marginal cost (cost of working). You will want touse the term “opportunity cost.”
G. Deadweight loss typically ends up taking the shape of a triangle. But in which of the following cases would it take the shape of a rectangle?

a. MV slopes up and MC slopes down.

b. MC and MV are both constant (flat lines), but at a certain quantity, you don’t want any more and MV becomes zero.

c. MV slopes down and MC is constant.

d. A tax is levied on a good as a lump sum rather than on a per-unit basis.

e. It never will, this is impossible.