1. What is the efficient allocation ? That is, what quantity and mix of right and left shoes would a social planner implement? 2. Suppose the firm behaves like a monopolist , i.e., sets the price of shoe pairs to maximize its profits. What price will the firm charge for a pair? How many pairs will the firm produce? 3. Does the monopolist implement the efficient allocation ? What role can a benevolent government play, if any? Exercise 16 A pharmaceutical monopoly produces antiretroviral drugs at a cost of $200 per therapeutic course. Each patient only wants to purchase one course. There are two types of patients, each type with a different reservation value for the course. Patients in Europe, of which there are 1 million , are willing to pay up to 20,000 for the course. Patients in Africa, of which there are 3 millions, are willing to pay up to :300 for the course . 1. What is the efficient allocation ? 2. Suppose the monopolistic company can charge different prices in Europe and in Africa What prices will the company charge in Europe and in Africa ? Is the outcome efficient ? 3. Suppose the monopolistic company cannot charge different prices in Europe and in Africa , perhaps because profiteers would purchase the drug in the cheaper continent and resell it at a profit in the more expensive continent. What price will the company charge? Is the outcome efficient? 4. Compare the two scenarios in 2) and 3). In which scenario does the monopoly have more market power? In which scenario is the outcome more efficient? Exercise 17 A large population of motorists is seeking to buy automobile insurance . Half the motorists are good risks : their probability of accident is 1 percent . Half are bad risks : their probability of accident is 5 percent. Consider an insurance contract that promises to pay @1,000 in case of accident, and zero otherwise. A fair price for the contract is the price which yields zero profits on average for the insurer who offers it. 1. Assuming all motorists buy the insurance contract , , what is the fair price of the con - tract