A. SUPPLY OF HEALTH CARE

You are about to graduate from college and are trying to decide whether to go to medical school to become a physician or get a job as a lab technician in a doctor's office. The salary in the four earnings periods are as follows:

Period 0 Period 1 Period 2

Physician -5 1 10

Lab tech 2 3 4

1.Let's say your discount factor, , is 0.90. In one sentence, explain what this means.

2.What is the discount rate, r, that corresponds with your discount factor? Show your work.

3.Calculate the net present value (NPV) or becoming a nurse practitioner and becoming a lab tech. Which career do you prefer?

4.Provide three examples of why physicians don't always act as perfect agents for their patients.

B.PERFECT COMPETITION

Atorvastatin is a pharmaceutical drug used to treat cardiovascular disease. It was patented by the company Pfizer in 1986, who began selling it in the U.S. in 1996 under the brand name Lipitor. It has consistently been one of the best-selling prescription drugs. In 2011, Pfizer's patent expired, which means that other companies were allowed to sell generic versions of atorvastatin to compete with Lipitor. For simplicity, let's assume manufacturing atorvastatin is a simple process that anybody can do (this is not actually true in the real world).

1.What characteristics would have to be satisfied for the market for generic atorvastatin to be perfectly competitive? Pick one characteristic that you think is not true of the pharmaceutical industry in the real world and explain why.

2.For the sake of this homework, let's assume the characteristics in question 1 are satisfied, and you decide to enter the pharmaceutical industry by manufacturing generic atorvastatin. The going price for generic atorvastatin is $0.75. What will happen to your sales if you try to sell for a higher price than $0.75? Why?

3.You calculate your cost of manufacturing atorvastatin, based on the cost of renting a space, materials, etc. Based on your calculations, your total cost of manufacturing atorvastatin is C = 0.0015Q² and the marginal cost is MC = 0.003Q. If you're trying to maximize profits, how many pills should you manufacture and how much should you sell each pill for?

4.Assume the same costs as Question 3. What will your maximum short-run profit be?

5.What do you expect will happen to your profit in the long-run? Why?