(30 points) Elderly individuals with certain health conditions often need some form of inhome care if they want to continue living on their own. When skilled professionals offer full or part time care to an elderly individual (assisting with the individual's daily routine, providing companionship, completing household chores, and providing security against falls and other potential hazards), it is known as companion care. a. Consider the market for companion care in the United States. Assume that the market is in equilibrium when providers are paid $30 per hour for their services, and at this price, 40 million hours of companion care are utilized. Also, suppose additional data shows the following: i. If the hourly price were set at $35, then there would be 32 million hours of companion care demanded and 50 million hours supplied. ii. If the hourly price were set at $20, then there would be 56 million hours of companion care demanded and 20 million hours supplied. iii. The market demand curve touches the price axis at an hourly price of $55, and the market supply curve touches the price axis at $10 per hour. Create a supply and demand graph for the companion care market that is consistent with all of the information above. Be sure to label all axes and curves. b. Using different colors, shade in the consumer and producer surplus regions on your graph of the initial equilibrium. Also, shade in the deadweight loss region if there is one. What is the size of the total economic surplus? (Hint: Do a calculation to find it!) c. Unless companion care is deemed medically necessary, insurance companies often will not cover the cost of it, and it can be pretty expensive for elderly patients to pay for out-of-pocket. Suppose the government recognizes this, and attempts to help keep the price affordable for more consumers by imposing a price ceiling of $20 per hour on the market. Using new colors (or new shading patterns - whatever is possible), indicate the new consumer and producer surplus regions after the price ceiling is imposed. Also, shade in the deadweight loss region if there is one. d. Describe the changes you see between the market at equilibrium and the market with a price ceiling - who (if anyone) is made better off by this new price control, and who (if anyone) is made worse off? Has the government succeeded in its goal? e. Think back to the different ways that governments can become involved in markets (Hint: Chapter 6 is called "When Governments Intervene in Markets" if you are looking for some inspiration!). What are two other policy options that a government might consider in an effort to achieve its stated goal in the companion care market? Of these two options, which do you think will lead to more desirable outcomes and why? (30 points) Elderly individuals with certain health conditions often need some form of inhome care if they want to continue living on their own. When skilled professionals offer full or part time care to an elderly individual (assisting with the individual's daily routine, providing companionship, completing household chores, and providing security against falls and other potential hazards), it is known as companion care. a. Consider the market for companion care in the United States. Assume that the market is in equilibrium when providers are paid $30 per hour for their services, and at this price, 40 million hours of companion care are utilized. Also, suppose additional data shows the following: i. If the hourly price were set at $35, then there would be 32 million hours of companion care demanded and 50 million hours supplied. ii. If the hourly price were set at $20, then there would be 56 million hours of companion care demanded and 20 million hours supplied. iii. The market demand curve touches the price axis at an hourly price of $55, and the market supply curve touches the price axis at $10 per hour. Create a supply and demand graph for the companion care market that is consistent with all of the information above. Be sure to label all axes and curves. b. Using different colors, shade in the consumer and producer surplus regions on your graph of the initial equilibrium. Also, shade in the deadweight loss region if there is one. What is the size of the total economic surplus? (Hint: Do a calculation to find it!) c. Unless companion care is deemed medically necessary, insurance companies often will not cover the cost of it, and it can be pretty expensive for elderly patients to pay for out-of-pocket. Suppose the government recognizes this, and attempts to help keep the price affordable for more consumers by imposing a price ceiling of $20 per hour on the market. Using new colors (or new shading patterns - whatever is possible), indicate the new consumer and producer surplus regions after the price ceiling is imposed. Also, shade in the deadweight loss region if there is one. d. Describe the changes you see between the market at equilibrium and the market with a price ceiling - who (if anyone) is made better off by this new price control, and who (if anyone) is made worse off? Has the government succeeded in its goal? e. Think back to the different ways that governments can become involved in markets (Hint: Chapter 6 is called "When Governments Intervene in Markets" if you are looking for some inspiration!). What are two other policy options that a government might consider in an effort to achieve its stated goal in the companion care market? Of these two options, which do you think will lead to more desirable outcomes and why
