Eco 201 Name_________________________ Final Exam 7 July 2005 120 points. Please write answers in ink. You can use a pencil to draw graphs, Good luck, and enjoy the rest of your summer. 1. Illustrate and explain the price searcher’s optimum price and quantity to produce. On the same graph show the competitive price and output. Show the buyers’ gains, the seller’s gains, to total expenditure by consumers, and the deadweight loss. Explain why the price searcher’s optimum choice of price and quantity results in a deadweight loss. 2. Each of the events below has an impact on the market for bicycles. For each event, which curve is affected (supply or demand for bicycles), what direction is it shifted, and what is the resulting impact on the market clearing price and quantity for bicycles? a. An increase in the price of gasoline. b. A decrease in income of consumers. c. An increase in the price of steel and aluminum used to make bicycle frames. d. An environmental movement shifts tastes away from driving automobiles. e. A technological advance in the manufacture of bicycles. f. A reduction in the price of bicycle helmets. 3. Early in the development of economic science, social philosophers contemplated what was to them an important question: "How can water, which is quite valuable to use, command such a low price when diamonds which are less useful, command such a high price." This apparent inconsistency between the relative prices and values of water and diamonds became known as the "water-diamond paradox." Please explain how the water-diamond paradox can be resolved. 4. Please read the attached article "Rising Supply of Doctors May be Bad Medicine for Health Costs," Wall Street Journal, 8 May 1991. Does the evidence presented in the article contradict the law of demand, or is it possible that rising physician fees can be consistent with a rising supply of doctors? Explain. 5. Illustrate and explain carefully the social optimum level of paper production taking into account all scarce resources—including the use of rivers as sinks for effluent—that get used in the production of paper. Under what conditions will the level of paper production not be at the social optimum? Will paper production tend to be too high or too low under these conditions? Explain.Rising Supply of Doctors May Be Bad Medicine for Health Costs May 8, 1991, p. B1 By Ron Winslow Staff Reporter of THE WALL STREET JOURNAL The nation's growing supply of doctors poses a major threat to efforts to control rising health costs, two new studies suggest. By the year 2000, the number of doctors per capita in the U.S. is expected to have jumped 22% from 1986 levels, one report says. The increase alone could add as much as $40 billion a year to the nation's health bill. The second study found that even under Quebec's system of stringent price controls, total physician costs in that Canadian province rose significantly in the mid-1980s—in parallel with a rise in the number of doctors. Sobering Perspective Together the papers offer a new and sobering perspective on the role of physicians in the health-cost dilemma. Government programs in both the U.S. and Canada, as well as hundreds of U.S. companies, are struggling to contain costs by limiting physician fees and services. The reports indicate such strategies could be undermined by the swelling ranks of doctors. "Cost containment may ultimately require constraints on the number of physicians allowed to enter the system," adds John S. Hughes of the Yale University School of Medicine, New Haven, Conn. He looked at Canadian efforts to control physician costs. Both reports appear in today's Journal of the American Medical Association. It is possible that a growing supply of physicians could boost competition and—under classic supply-and-demand economic theory—result in reduced costs, especially when large purchasers of care are increasingly looking for leverage to negotiate discounts. But Drs. Grumbach and Lee note that the rising number of physicians in the U.S. and elsewhere in the past decade has coincided with climbing gross incomes, supporting the widely held belief that doctors, rather than consumers, control demand and compensate for any income shortfall by performing and billing for more services. General Medicine Because most new doctors who will be practicing by 2000 are already in medical school or residency training, there is little immediate chance of curtailing the supply, though increases could be mitigated, if more new doctors choose general medicine over specialties, the authors say. The U.S. Health Care Financing Administration plans to revise its fee schedule for doctors who care for Medicare patients in a bid to contain growth of doctor costs. In his study, Dr. Hughes found that under a similar fee schedule, physician costs in Canada rose 69%, adjusted forinflation between 1975 and 1987; in the U.S. the increase was 89%. But use of medical services jumped 46% in Canada, compared with 32% in the U.S. Physicians' ability to offset fee limits by ordering more services as well as easier access to care for Canadians under the national health system may explain the rise in services, Dr. Hughes says. But he also suggested that growth in the supply of doctors plays a role. In Quebec, the amount of services provided by individual doctors was stable after 1980, but the services consumed by people in Quebec jumped higher than in two other provinces, British Columbia and Ontario, where the number of doctors was lower. Neither report considered the roles that new, more expensive technology, "creative" or fraudulent billing practices, or the ordering of unnecessary medical services may play in contributing to physician costs. Note: Several non-essential paragraphs have been deleted from this