correct answers.

4. Suppose a doctor's visit actually costs $90. In other words, the marginal cost of seeing the doctor is constant at $90. Bob has demand for doctor's visits given by the following equation where is the quantity demanded and P is the price of a doctor's visit: = 100.5

e. Suppose Bob's insurance plan calls for a $50 co-pay. How many times will Bob go to the doctor? What is the dollar value of the moral hazard with the co-pay? Illustrate with a diagram and calculate.

f. Compare and contrast your analysis in part e. to the situation where the insurance company requires a 20% coinsurance rate instead of a co-pay.

g. Is it possible that the co-pay or coinsurance cold actually reduce social wellbeing? Explain.

Consider an oligopolistic market with N firms competing la Cournot.. Firm i's cost function is given by C (q ) cq (i 1,...N) i i = i =

. Show that the ratio between industry profits and revenue is given by H / , where H measures the Herfindahl index of concentration. How would this result change if you considered a conjectural variation model of oligopoly, assuming, for simplicity, symmetric firms?

Suppose there are two large grain elevators (consolidators) in Iowa that buy all of the wheat from many small farmers and sell it on the world market at the price > 100. The aggregate supply curve among the farmers is S(p)-p-100, where p is the local price of wheat (Le, the price the Cevators pay), and this is known by the elevators. Prior to the start of the planting season, the elevators (buyers-duopsonists) announce their demands (the quantities they wish to purchase), and the local price is determined to clear the market, that is, to elicit the aggregate quantity demanded from the farmers. The buyers thus act as middlemen, and their objective is to maximize the difference between the value of their sales and the value of their purchases.

(a) Determine the equilibrium demands of the elevator operators.

(b) Discuss the effect of an increase in p on the equilibrium quantities, local price, and profits of the elevators.

(c) Suppose all of the wheat is sold abroad and foreign governments impose a tariff t on U.S. wheat imports. Assuming those countries can continue to buy wheat from other sources at the price p, how would this affect the equilibrium quantities and local price?

(d) Now suppose there is a domestic market for Iowa's wheat with market demand given by D(p) = 200-p, where p is the price elevators receive. Assuming the elevators sell their entire stock domestically, they then act as duopsonists in the local market and duopolists in the domestic or national market for Iowa wheat. Determine the amounts they will purchase locally and sell nationally and the prices at which they would do so, i.e., p and p'.

(e) Now suppose the elevators can sell in both the domestic market as in part d and internationally (without the tariff) as in part a. Formulate the (Nash) decision

address all questions

Write short notes on the following fundamental concepts:

Scarcity and Choice

Opportunity cost

Production possibility frontier

Positive and normative economics

Using examples, explain 'Ceteris Paribus' as used in economics

i) Why is the consumer said to be sovereign

ii) What factors limit this sovereignty?

Consider an economy with three consumers, three different inputs and three different outputs. Each consumer i is initially endowed only with one unit of input i (time for labor of type 1) and consumes only output i (i=1,2,3). The consumers live on a circle, facing inward, and each consumer can use its input to produce the output it consumes and/or to produce the output that is consumed by its neighbor to the left (clockwise along the circle). Formally, consumer i (i=1,2,3) can use 20 units of input i to produce f, units of output i and can use L, 20 units of input i to produce 21 units of output i+1, where f. + L, 1. Here, "output 4" is another name for output 1 and "consumer i = 4" is another name for consumer 1

consumer is less productive in producing its own output than in producing the output consumed by its neighbor.) Consumer i gets utility z, by consuming z, 20 units of good i.

(a) Specify the set of feasible allocations for this economy, assuming that there is free disposal of all goods. Use the notation above and any other notation you need, defining any notation you introduce.

(b) Suppose that the consumers are not able to trade. They can only produce (using their own initial endowments) and consume. What are their optimal input, output and consumption choices?

(c) Suppose, instead, that any two consumers can freely trade any goods with each other. Each consumer i is still the only consumer able to produce output using input i. Assume that trading does not use up any resources (either inputs or outputs). No consumer is forced to trade and no trade by a pair of consumers occurs if it reduces a consumer's utility. What trades might consumer 2 make with consumer 3 that both consumers would agree to, with no involvement of consumer 17 What trades might consumer 2 make with consumer 1 that both consumers would agree to, with no involvement of consumer 3? What conclusion can you draw about the final allocation if the only possible trades are bilateral (between two consumers, without involvement of the third)? Explain.

(d) The economy can be viewed as a private ownership economy in which each con sumer i owns firm i, which has the production possibilities of consumer i. Specify the production set of firm 2 in this private ownership economy.

Consider a two- period model of a small open economy with a single...

Consider a two- period model of a small open economy with a single good each period. Let preferences of the representative household be described by the utility function

lnC1 +lnC2,

where C1 and C2 denote consumption in periods 1 and 2, respectively. In pe- riods 1 and 2, the household receives profits from the firms it owns, denoted 1 and 2, respectively. Households and firms have access to financial mar- kets where they can borrow or lend at the interest rate r1. The production technologies in periods 1 and 2 are given by

Q1=A1I0alpha

and

Q2=A2I1alpha

where Q1 and Q2 denote output in periods 1 and 2 I0 and I1 denote the

capital stock in periods 1 and 2, A1 and A2 denote the productivity factors

in periods 1 and 2, and alpha is a parameter. Assume that I0=16 A1 = 10/3

A2 = 3.2,

and alpha = 3/4 .

At the beginning of period 1 households have B0h= 8 bonds. The interest rate on bonds held from period 0 to period 1 is r0 = 0.25 In period 1, firms borrow the amount D1f to purchase investment goods that become productive capital in period 2, I1. Assume that there exists free international capital mobility and that the world interest rate, denoted r*, is 20 percent.

1. Compute output and profits in period 1.

2. Compute the optimal levels of investment in period 1 and output and profits in period 2.

3. Solve for the optimal levels of consumption in periods 1 and 2.

4.) Find the country's net foreign asset position at the end of period 1, denoted B1*, saving, S1, the trade balance, TB1, and the current account, CA1.

5 Now consider an interest-rate hike in period 1. Specifically, assume that as a result of turmoil in international financial markets, the world interest rate increases from 20 percent to 50 percent in period 1. Find the equilibrium levels of saving, investment, the trade balance, the current account, and the country's net foreign asset position in period 1. Provide intuition.

6 Suppose that the interest rate is 20 percent, and that A1 increases to 4. Calculate the equilibrium values of consumption, saving, investment, and the current account in period 1. Explain.

7 Suppose that the interest rate is 20 percent, that A1 = 10/3 A2 increases from 3.2 to 4. Calculate the equilibrium values of con- sumption, saving, investment, and the current account in period 1. Explain.