1. Why should the government intervene in situations of market failure? Should the government intervene if a market is fully efficient in the sense of being perfectly competitive? What additional rationales are present if there is an inadequacy in the market? 2. A frequent proposal has been to replace the oversight process through a system known as "regulatory budget." Each agency would be assigned a total cost that it could impose on the American economy, and its task would be to select the regulations that best foster the national interest subject to this cost. Can you identify any problems with the regulatory budget approach? How feasible do you believe it would be to calculate the costs of all the regulations of a particular agency? 3. Use Table 1 below to answer the following questions: Table 1: Combined market demand and supply schedule for antiobiotics Price Quantity Demanded Quantity Supplied $10 $8 $6 $4 $2 PR989 0 20 40 60 80 125 95 65 35 5 (a) On the same graph, draw the demand and supply curves. What does the demand curve for a product describe? What does the supply curve for a product describe? (Be specific.) (b) Use your graph to identify the equilibrium price and quantity. Ex- plain why this is an equilibrium point. (c) Suppose that a federal program fixes the price at $7.00. Explain, referring to your graph, what will happen to the antiobiotic market. (d) Suppose it was previously unknown and only recently discovered that when antiobiotics are used by one individual it reduces the likelyhood of others contracting a disesase. If this new discovery is not captured in the price of the antiobiotics, what term from class would best describe this? (e) What could the federal government do to correct the market from the issue described in the question above? 4. Lithium is widely used to treat mental illness including mania an bipolar depression. Lithium is also a chemical element that can be extracted from natural mineral springs and brine deposits. South America currently has the largest known lithium reserves, which Chile and Argentina account- ing for the largest shares. How might political instability in Chile and Argentina be useful in tracing out the demand for Lithium in the United States? 5. Additional research into the above question has determined that the elas- ticity of demand for Lithium is roughly -1.2. Currently there is a govern- mental program that provides Lithium at a 95% discount to those who qualify for Medicaid. If this subsidy is removed, what will happen to the quantity of Lithium demanded? Specifically, by what percentage will the quantity demanded change?