1. Consider a college graduate aged 22 deciding whether to become a G.P. Retirement is at age 62. All dollar figures given below are given in real dollars. If she becomes a G.P. then annual income is -$20,000 (the cost of Med school) for each of years 1 to 4; $40,000 for each of years 5 to 8 (resident's income) and $120,000 for each of years 9 to 40 Alternatively she can immediately get a job, beginning at $30,000 in year 1 and rising by $1,000 each year to $69,000 in year 40. (a) Give the difference in income (G.P. income - non-G.P. income) in years 1-10 and in year 40. (b) Show that without discounting total lifetime income as a G.P. will be $1,940,000 higher than if she is not a G.P. (c) Now consider discounting. The present discounted value of the investment in G.P. training compared to no training is PDV = Y1/(1+r) + Yo/(1+r)+ ....+ Y40/(1+r)#0 where Yo is net return in year 1 (here -$20,000 - $30,000 = -$50,000), Y2 is net return in year 2 (here $51,000 and so on). The PDV varies with the discount rate. It can be shown that Discount rate r 00 .05 10 .15 20 PDV 1,940,000 584,959 174,176 24,192 -37,450 What approximately is the internal rate of return to investing in training to become a G.P.? (The internal rate of return is that discount rate for which an investment just breaks even.) (d) Optional Use a spreadsheet such as Excel to calculate the PDV's in part c. 2. Suppose a hospital has constant marginal costs (equal to average cost). It can act as a monopolist in pricing to private patients. But it also must treat Medicaid patients at a reimbursement rate that is less than marginal cost. (a) Will the hospital necessarily go out of business? Provide a verbal explanation. (b) Now use appropriate diagrams to explain your answer. 3. Consider a drug company with patented drug behaving as a profit-maximizing monopolist. It can be shown that for a monopolist MR = P x (1 + 1) where n is the price elasticity of demand (which is negative) and price is the amount received by the drug company. Recall that at a profit maximum MR = MC. (a) Suppose that the price elasticity of demand for a drug is -4. How much more than marginal cost of production will the monopolist sell the drug for? (b) Why do drug companies spend so much money on advertising? (c) Why does the government permit drug companies to be a monopolist? (d) On appropriate diagrams show how the drug company may price differently in two different markets (such as two different countries) even when MC is the same (and constant) in the two markets