Table 1. Elasticities and Costs

Demand Elasticities

Hospital Care( open heart surgery) 0.14 $10,000 per procedure

Primary Care 0.20 $ 500 per visit

a.Please describe how a price ceiling works.Using this description and the data in Table 1, would you put a ceiling price on both services in the table?Why or why not?If you had to put a ceiling price on both services, what prices would you put as the price ceiling?

b.Using both services listed in the table, use the price elasticity to help you draw the demand and supply curves for each service (on two different graphs).Show on the graphs the two price ceilings that you recommended in part a.

c.Discuss two advantages to putting these price controls in place.

d.As with rent control, there may be some short-run negative consequences of your price ceiling.Describe these negative consequences and for which service do you expect the largest negative consequences?

e.What do you expect to happen in the long-run with the two services discussed in this question if the price ceilings remain in place?