Health Economics Assignment Solution: Competitive Market Analysis

This assignment solution delves into key concepts in health economics. It begins by calculating a firm's profit maximization point, considering total revenue and cost functions, and determining the output level and profit at equilibrium. The solution then outlines the four characteristics of a perfectly competitive market, explaining the behavior of buyers, sellers, and the nature of the products. Finally, the assignment analyzes market failure under a monopoly, illustrating how a monopolist's behavior leads to inefficient resource allocation and a net welfare loss, using a graphical representation to compare the socially efficient equilibrium with the monopolist's output and pricing decisions. The assignment draws upon established economic principles and provides relevant references.

Running head: HEALTH CARE ECONOMICS
Health Care Economics
Name of the Student
Name of the University
Course ID

1HEALTH CARE ECONOMICS
Table of Contents
Question a...................................................................................................................................2
Question b..................................................................................................................................2
Question c...................................................................................................................................3
Question d..................................................................................................................................4
References..................................................................................................................................5

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Question a
Total revenue of the firm is given as,
TR=10Q
Total cost of the firm is,
TC=1000+2 Q+ 0.01Q2
Given the total revenue and total cost profit of the firm can be obtained as
Profit ( π ) =TR−TC
¿ 10 Q−1000−2Q−0.01Q2
¿ 8 Q−1000−0.01 Q2
The first order condition for profit maximization requires
dπ
dQ =0
¿ , 8−0.02Q=0
¿ , 0.02 Q=8
¿ , Q=400
The firm will produce 400 units per annum if it aims at profit maximization.
Question b
Total profit at equilibrium can be computed as
Profit=8 Q−1000−0.01 Q2
¿ ( 8 × 400 ) −1000− ( 0.01 × 4002 )

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¿ 3200−1000−1600
¿ 600
Question c
The four main characteristics of perfectly competitive market are as follows
Large number of buyers and sellers
In a perfectly competitive market, large number of buyers and sellers operate in the
market. Number of buyers and sellers are so large that each constitutes a very small part of
the total market demand and market supply.
Identical or homogenous product
All firms in a perfectly competitive market sells a homogenous or identical product.
The product sold by competing firms thus are perfect substitutes to each other.
No individual control the market price
Given the presence of a large number of sellers in the market, each supplies only a
small portion of the market. Individual sellers therefore has no control over the market price
and acts as price takers (Baumol & Blinder, 2015).
Free entry and exit
Firms face no barriers either to enter or exit the industry. In times of economic profit,
new firms enter the industry. If exiting firms incur loss, then they exit the industry.

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Question d
Monopoly and market failure
Market failure occurs when resources are allocated inefficiently in the market.
Monopolist being a single seller in the market enjoys enormous market power. Market failure
under a monopoly market occurs as the monopolist does not supply socially efficient quantity
and charge a high price (Cowell, 2018). This leads to a net welfare loss in the society causing
a market failure.
Figure 1: Monopoly market and market failure
The socially efficient equilibrium point is Ec. The socially desirable quantity of health
care service is Q* and associated price is P*. Now if the hospital enjoys monopoly power in
the provision of certain unique health intervention then it will operate at point EM, producing
less than socially desirable quantity at Q1 and charging a high price P1. The inefficient
outcome in monopoly resulted from failure of efficient functioning of market.

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References
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Nelson
Education.
Cowell, F. (2018). Microeconomics: principles and analysis. Oxford University Press.