Hi k9queen!
These are the asnwers to your questions.
A) You can find a graph at
http://www.angelfire.com/alt/elmarto
Since the problem states that each procedure has a cost of $100, I've
assumed that the supply curve of medical procedures is horizontal at
$100. In the graphic I've done, at $100, the demanded quantity is 24.
B) The graph for this question can be found at the same link. If the
price the consumers pay for medical procedures is $20; in the graph I
made the consumers will demand 43 procedures.
Does this quantity maximize the total surplus? No, it doesn't.
Maximization of total surplus requires that the units that are
produced are valued more than their cost. We know that the cost of
each procedure is $100. If you look at the graph, you will see that
the procedures below the 24th are valued at more than $100 (i.e. from
the demand curve we see that consumers are willing to pay more than
$100 for each unit below 24). However, beyond the 24th procedure,
units are valued at less than $100. For example, as we've seen, the
43rd unit is valued at $20. Therefore, the "production" of more than
24 units of the good (medical procedures) is inefficient, because the
cost of their production is more than their value to consumers.
C) As we've seen in the previous question, it's inefficient to produce
more than 24 units of the good, because their value to consumers is
less than their cost. Now, since the consumers actually pay $80 less
than the actual price, they will demand 43 units; more than the
efficient allocation. In this way, the use of medical care can be
considered excessive: it would be more efficient to have less medical
care (although not less than 24 medical procedures) because the cost
of that care more than offsets the value to the consumers.
D) Since we know that the problem is that there is "excessive" medical
care, if one wanted to achieve economic efficiency, one should take
policies aimed at reducing the quantity of medical care. One
possibility would be to reduce the subsidy the consumers receive for
taking medical care. In the question, the consumers get $80 for each
medical procedure they undertake. If this subsidy change and consumers
only received, say $30 per procedure, then the demand for medical
procedures would drop, reducing the quantity of medical procedures
"produced" and thus getting us "closer" to efficiency, at 24 units. In
this example, if consumers only received $30 per procedure, they would
end up paying $70 for each procedure. If you look at the graph, if the
price is $70, then the demand is approximately 30 units. This
represents a gain in efficieny, since all the inefficient units
between 30 and 43 are no longer being produced. Of course, it's
possible to go further and make a policy that completely eliminates
the subsidy. This would take the economy to the efficient production,
since consumers would be paying $100 for each procedure; so no units
with value less than the cost would be produced. In any case, we have
to be careful: notice that this analysis is merely an "efficiency"
analysis and not an "equality" analysis. We have arrived to the
conclusion that the best than be done is let consumers pay $100 for
each procedure; but in a real economy there are poor and rich and
consumers; and the poorer ones might not be able to afford the $100
price. Reasons of this sort are what lead real economies to subsidize
medical care.
In order to learn more about consumer, producer and total surplus, you
might want to check the following link:
MIBS 701
http://dmsweb.badm.sc.edu/chappell/IMBA701/Handouts/Chappell10.PPT
Google search strategy
inefficient "total surplus" consumer producer
://www.google.com/search?hl=en&lr=&ie=UTF-8&oe=UTF-8&q=inefficient+%22total+surplus%22+consumer+producer&btnG=Google+Search
I hope this helps! If you have any doubt regarding my answer, please
request a clarification before rating it. Otherwise, I await your
rating and final comments.
Best wishes!
elmarto |
