YOUR GRADER:_____________________

YOUR SECTION CODE: _____________

YOUR PRECEPTOR: _________________

YOUR NAME: _______________________

ECON 100-F2014
REINHARDT

HOMEWORK ASSIGNMENT NO. 4

EXERCISES ON PARETO EFFICIENCY

Please hand in your assignment at your precept during the week starting
Monday October 13, 2014.

QUESTION 1

a) Suppose the demand curve for routine physician visits of Individual A were P A = 160 – 20Q and
that of individual B PB = 400 – 70Q (Q = number of visits per period, P A – ask price per unit by
physicians, PB = bid price per visit by patients). Which individual would you bet is both healthier and
wealthier of the two (although we cannot, of course, be sure from the information given)?

YOUR ANSWER: _______ Explain in a sentence or two.

b) Suppose neither individual had health insurance coverage for physician visits or, alternatively,
that they faced a very high deductible on their insurance policy. If that deductible were, say, $5000
per year, it means health insurance would set in only after the family has spent $5,000 out of pocket
for health are that year. These policies are called “catastrophic health insurance,” because it insures
people only for high medical bills. If the market for physician visits were perfectly competitive (in real
life it is unlikely to be), and both individuals faced a market price of $120 per visit, how many visits
would each get.

ANSWER: A ____ visits/year, B ____ visits/year.

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(c) What marginal value would the two families attach to

1. The second visit/year Family A: ______________ Family B: ________________

d) Would the allocation of physician visits in this freely competiive market be efficient? Would
physicias necessarily agree? Explain.
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e) Suppose now that, perhaps because of an acute doctor shortage, government program put a price
ceiling of $120 on physiciaj vists and issued each individual non-tradable ration coupons for 3
physician vists per year. would that allocation be judged efficient by economists? Explain.

f) If you concluded that economists ruled the approach describe din (e) inefficient, could you think of
a scheme moving the allocation closer to what economists would consider effciient. If NO, say so. If
YES, explain.
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QUESTION 2

Suppose the graph below represented some agricultural commodity subject to a government-set
price floor. (You will recall we have this for dairy products in the U.S.) Assume the government buys
up all surplus in this market and then gives it away as foreign aid to other nations. If we assume
Americans assign zero value to the foreign aid, and thinking in terms of social welfare of Americans
only, perform a formal welfare analysis. Which Americans gain, and how much, and which lose, and
how much?
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