4. Assume the market for Type I Preventive Service dental procedures in New York City is perfectly competitive and consumers have no insurance coverage. In NYC, the daily market demand for these procedures is Qd = 20,000 â?" 50P, and the industry supply is Qs = -4,000 + 100P. To help illustrate, you might want to graph these equations once you solve for part a.
a. What is the market-clearing price of Type I procedures in competitive equilibrium? How many procedures are bought and sold daily in NYC?
b. Explain why the NYC Type I market is expected to achieve productive efficiency in competitive equilibrium.
c. Compute consumer, producer, and total social surplus given your answers to part a.
Next, suppose that the mayor of NYC imposes a $120 per procedure price ceiling on Type I procedures.
d. Does the ceiling price cause a surplus or a shortage of procedures in NYC? What is the amount of the surplus or shortage?
e. Calculate consumer surplus under the price ceiling. Are consumers in NYC better off with the mayorâ??s price ceiling on Type I procedures? Explain.
f. Calculate producer surplus under the price ceiling. Are dentists in NYC better off with the mayorâ??s price ceiling on Type I procedures? Explain.
g. Calculate total social surplus under the price ceiling. Is society (New York City) better off with the mayorâ??s price ceiling on Type I procedures? Explain.
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a. We can solve for equilibrium algebraically.
at eq., Qs=Qd, so 20000 - 50P = -4000 + 100P, this leads to P = 160. Q = 20000 - 50(160) = 12000.
b. The reason that market is efficient in a a competitive equilibrium is because marginal cost (MC) = price. The implication of marginal cost = price is that the amount that the society is willing to pay for this good is exactly equal to the cost of producing this good. An example of inefficiency may be if the MC = 10 > P = 8, then the good only benefits ...
efficiency, surplus, price ceiling