PLEASE READ ALL INSTRUCTIONS CAREFULLY. Points will be deducted where instructions are not followed.

Draw graphs clearly, label every line and all key points.Use graphing boxes to draw your graphs to scale and label the scale (e.g. 1 box = $10).You lose points for under-labeling.You cannot lose points for over-labeling.

While this is an open-book, open-notes exam it is expected that you will not copy graphs, or solutions to problems from the internet. For the essay portion of this exam, please cite resources accordingly.

Calculations must be included for full credit.

All graphs must be entitledFig.1, Fig. 2, etc., and asyouwriteyoushould refer to these graphs by their titles.Advice: Draw BIG graphs to improveclarity.

Part I: Analytical Exercise

1. Health Care Demand (25 points)

Imagine the market for stents in the United States.Below is a table of prices and quantities.

Price	Quantity
$100,000	0
$80,000	500,000
$60,000	1,000,000
$40,000	1,500,000
$20,000	2,000,000
$0	2,500,000

a) Please draw the demand curve and label all key points on the graph. (5 points)

b) One supplier is willing to make 500,000 stents for $20,000 each, but cannot make any more no matter what.A second will make an additional 500,000 stents if the price is 40,000, but cannot make any more.Another will make 500,000 if the price is 60,000, but also cannot make more.An additional firm will make up to 1.0 million stents if the price is $80,000 per stent.The quality of the stents is equal across companies.Draw the supply curve (assume the supply curve is smooth) and label key points including the equilibrium point. What is the price and quantity at the equilibrium point? (5 points) Hint: Remember the trick in Homework 1.

c) An article comes out in the New England Journal of Medicine indicating that the probability of success of stents is lower than expected.500,000 people demanding stents exit the market (assume this is the same for all prices). The rest of the market does not change.Describe in three to four sen tences what is happening in the market. (5 points)

d) Please draw the shift on the same graph as the demand and supply curve and label it.What are the new price and quantity at the equilibrium point? (5 points)

e) The prior demand curves are based on an uninsured population.However, the population is now insured with no deductible and a coinsurance rate of 25%.Use D', the demand curve in part c to determine what the cost is to the consumer?What is the quantity demanded?Draw adotted linerepresenting the coinsurance rate on your graph and label it COINS. (5 points)

2. Adverse Selection (20 points)

a) Imagine a health insurance market with 100 people.In this market in Year 1, 40 people expect to have $0 in health expenses per year, 35 people expect to have $250 in health expenses per person per year, 12 people expect $5,000 in health expenses per person per year, 10 people expect $10,000 in health expenses and 2 people expect $25,000 in health expenses and 1 person expects $40,000 in health expenses over the entire year per person.Assume insurance covers 100% of medical expenses and premiums are equal to expected costs.

What is the expected cost of insurance in year 1? (5 points)Note, use this premium as the Y1 premium across all parts of this problem.

b) In Year 1, how many people would choose to buy insurance and how many would not choose to buy insurance based on the premium and their expected benefits? (5 points)

c) What would the Y2 premium be based on the individuals who choose to buy insurance? (5 points)

d) Describe adverse selection in health insurance in your-own-words. (5 points)

3. Monopoly (20 points)

You are the economist for a major pharmaceutical manufacturer.Your just received the good news that your new blockbuster cholesterol drug LOZERV has been approved by the FDA for sale in the United States. The drug is extremely effective and physicians are interested in prescribing it immediately. Your team has provided you the graph below of the market demand and the marginal cost of producing the drug.Please answer the following questions based on the graph.The graph is drawn to scale and answers should be numerical (e.g 10,000 units of the drug).The drug is currently on-patent.

a) What should the production level be for the drug? In other words, how many units of the drug per year should be produced. (5 points)

b) What price should you set for the drug? Explain why you selected that price. (5 points)

c) What is the company's profit at this price and quantity assuming the average cost of production at your level of production is $10,000 per year of the drug? Show your work. (5 points)

d) What will the new price be when generics enter the market?What is the new quantity that will be sold? (5 points)