MHA 710 Exam 3 Questions And
Answers
Arcityrwithrthreer100-bedrhospitalsrwouldrberdescribedrasr-rCORRECTrrANSWER-
anroligopolyrmarket.
Armarketrinrwhichrtherentirerdemandrforrargoodrorrservicercanrbersatisfiedratrtherleastrcostrbyr
arsinglerfirmrisrar-rCORRECTrrANSWER-naturalrmonopoly.
Arnegativerexternality:r-rCORRECTrrANSWER-
israrcostrbornerbyrpartiesrnotrinvolvedrinrtherproductionrorrconsumptionrofrargoodrandrresultsr
fromrtherabsencerofrwell-definedrpropertyrrights
Arsystemranticipatesrthatrspendingr$300,000ronranradvertisingrcampaignrwillrincreaserbedr
daysrbyr650.rThermarketingrdepartmentranticipatesrthatreachradditionalrbedrdayrwillryieldr$2
,100rinradditionalrrevenuerandrwillrincreasercostsrbyr$1,700.rThercampaignr-
rCORRECTrrANSWER-willrreducerprofitsrbyr$40,000.
AccordingrtorCoase,rexternalityrproblemsr-rCORRECTrrANSWER-
canrbersolvedrthroughrprivaternegotiationsrwithoutrtherneedrforrgovernmentrintervention.
Anrexamplerofrarpositiverexternalityrisr-rCORRECTrrANSWER-receivingranrimmunization
Assumersixrfirmsrcomprisingranrindustryrhavermarketrsharesrofr40,r30,r10,r10,r5,randr5rperce
nt.rTherHerfindahlr(HHI)rindexrforrthisrindustryrisr-rCORRECTrrANSWER-2,750
Assumerthersupplyrofrarproductrbasedronrprivatercostrofrproductionrisrgivenrbyr12P=Q12P=
Q.rIfrdemandrisrQ=30−12PQ=30−12P,rhowrmuchroutputrwouldrberproduced?r-
rCORRECTrrANSWER-15
Assumerthersupplyrofrarproductrbasedronrprivatercostrofrproductionrisrgivenrbyr12P=Q12P=
Q.rIfrdemandrisrQ=30−12PQ=30−12P,rwhatrpricerwouldrexistrinrthermarket?r-
rCORRECTrrANSWER-30
Assumertworfirmsrexistrinrthermarket,rBuckleyrandrStetler.rIfrtheyrmerge,rtheyrwillrhaverfixedr
costsrofr$140,000,rmarginalrcostsrofr$50,randrarmarketrsharerofr6rpercent.rTherpricerelasticit
yrofrdemandrforrclinicrservicesrisr-0.22.rAssumerthervolumerofrpatientsratrtherprofit-
, maximizingrpricerisr24,600.rThermergedrfirm'srestimatedrpricerelasticityrofrdemandrisr-
rCORRECTrrANSWER--3.667
Assumertworfirmsrexistrinrthermarket,rBuckleyrandrStetler.rIfrtheyrmerge,rtheyrwillrhaverfixedr
costsrofr$140,000,rmarginalrcostsrofr$50,randrarmarketrsharerofr6rpercent.rTherpricerelasticit
yrofrdemandrforrclinicrservicesrisr-0.22.rAssumerthervolumerofrpatientsratrtherprofit-
maximizingrpricerisr24,600.rThermergedrfirm'srprofit-maximizingrpricerisr-
rCORRECTrrANSWER-68.75
Assumertworfirmsrexistrinrthermarket,rBuckleyrandrStetler.rIfrtheyrmerge,rtheyrwillrhaverfixedr
costsrofr$140,000,rmarginalrcostsrofr$50,randrarmarketrsharerofr6rpercent.rTherpricerelasticit
yrofrdemandrforrclinicrservicesrisr-0.22.rAssumerthervolumerofrpatientsratrtherprofit-
maximizingrpricerisr24,600.rThermergedrfirm'srprofitsrwillrber-rCORRECTrrANSWER-
$321,250
Confrontedrwithrthersamerunitrcostrdata,rarmonopolyrproducerrwillrcharge:r-
rCORRECTrrANSWER-arhigherrpricerandrhaverarhigherrprofitrthanrarcompetitiverfirm.
Demand-sidermarketrfailuresroccurrwhenr-rCORRECTrrANSWER-
demandrcurvesrdon'trreflectrconsumers'rfullrwillingnessrtorpayrforrargoodrorrservice.
Generallyrspeaking,rifrarfirmrfacesrdecreasingraveragertotalrcostsrofrproductionrthroughoutrit
srentirerrangerofroutput,rthenr-rCORRECTrrANSWER-therfirmrisrarnaturalrmonopoly
Healthcarerorganizationsrtypicallyrhavermarketrpowerr-rCORRECTrrANSWER-
a.rbecausertheyrhaverarlimitedrnumberrofrcompetitors.
b.rbecausermanyrhealthcarerproductsrandrservicesrarer"experience"rgoods.
c.rbecauserregulationsrlimitrwhorcanrcompeterwithrthem.
d.rAllrofrtherabove.
Ifrmanyrpeoplerinrarcommunityrgetrflurshots,rtherwholercommunityrbenefits,rincludingrthosert
hatrdidrnotrgetrflurshots.rTherefore,rnotrenoughrpeoplermayrdecidertorgetrthershots.rThisrisron
erillustrationrofr-rCORRECTrrANSWER-demand-sidermarketrfailure.
Ifrproductionrcausesranrexternalrcostrandrthersupplyrincludingrtherexternalityrisrgivenrbyr13P
=Q13P=Q.rWhatrisrthersociallyrefficientrlevelrofrofrproductionrifrdemandrisrQ=30−12PQ=30−
12P?r-rCORRECTrrANSWER-12
Ifrproductionrcausesranrexternalrcostrandrthersupplyrincludingrtherexternalityrisrgivenrbyr13P
=Q13P=Q.rWhatrisrthersociallyrefficientrpricerifrdemandrisrQ=30−12PQ=30−12P?r-
rCORRECTrrANSWER-36
Inrarmonopolisticallyrcompetitivermarket,rtherlargerrthernumberrofrfirmsrandrthersmallerrtherd
egreerofrproductrdifferentiation,rther-rCORRECTrrANSWER-
morerelasticrisrthermonopolisticallyrcompetitiverfirm'srdemandrcurve,rresultingrinrarsmallerr
markuproverrMC.
Answers
Arcityrwithrthreer100-bedrhospitalsrwouldrberdescribedrasr-rCORRECTrrANSWER-
anroligopolyrmarket.
Armarketrinrwhichrtherentirerdemandrforrargoodrorrservicercanrbersatisfiedratrtherleastrcostrbyr
arsinglerfirmrisrar-rCORRECTrrANSWER-naturalrmonopoly.
Arnegativerexternality:r-rCORRECTrrANSWER-
israrcostrbornerbyrpartiesrnotrinvolvedrinrtherproductionrorrconsumptionrofrargoodrandrresultsr
fromrtherabsencerofrwell-definedrpropertyrrights
Arsystemranticipatesrthatrspendingr$300,000ronranradvertisingrcampaignrwillrincreaserbedr
daysrbyr650.rThermarketingrdepartmentranticipatesrthatreachradditionalrbedrdayrwillryieldr$2
,100rinradditionalrrevenuerandrwillrincreasercostsrbyr$1,700.rThercampaignr-
rCORRECTrrANSWER-willrreducerprofitsrbyr$40,000.
AccordingrtorCoase,rexternalityrproblemsr-rCORRECTrrANSWER-
canrbersolvedrthroughrprivaternegotiationsrwithoutrtherneedrforrgovernmentrintervention.
Anrexamplerofrarpositiverexternalityrisr-rCORRECTrrANSWER-receivingranrimmunization
Assumersixrfirmsrcomprisingranrindustryrhavermarketrsharesrofr40,r30,r10,r10,r5,randr5rperce
nt.rTherHerfindahlr(HHI)rindexrforrthisrindustryrisr-rCORRECTrrANSWER-2,750
Assumerthersupplyrofrarproductrbasedronrprivatercostrofrproductionrisrgivenrbyr12P=Q12P=
Q.rIfrdemandrisrQ=30−12PQ=30−12P,rhowrmuchroutputrwouldrberproduced?r-
rCORRECTrrANSWER-15
Assumerthersupplyrofrarproductrbasedronrprivatercostrofrproductionrisrgivenrbyr12P=Q12P=
Q.rIfrdemandrisrQ=30−12PQ=30−12P,rwhatrpricerwouldrexistrinrthermarket?r-
rCORRECTrrANSWER-30
Assumertworfirmsrexistrinrthermarket,rBuckleyrandrStetler.rIfrtheyrmerge,rtheyrwillrhaverfixedr
costsrofr$140,000,rmarginalrcostsrofr$50,randrarmarketrsharerofr6rpercent.rTherpricerelasticit
yrofrdemandrforrclinicrservicesrisr-0.22.rAssumerthervolumerofrpatientsratrtherprofit-
, maximizingrpricerisr24,600.rThermergedrfirm'srestimatedrpricerelasticityrofrdemandrisr-
rCORRECTrrANSWER--3.667
Assumertworfirmsrexistrinrthermarket,rBuckleyrandrStetler.rIfrtheyrmerge,rtheyrwillrhaverfixedr
costsrofr$140,000,rmarginalrcostsrofr$50,randrarmarketrsharerofr6rpercent.rTherpricerelasticit
yrofrdemandrforrclinicrservicesrisr-0.22.rAssumerthervolumerofrpatientsratrtherprofit-
maximizingrpricerisr24,600.rThermergedrfirm'srprofit-maximizingrpricerisr-
rCORRECTrrANSWER-68.75
Assumertworfirmsrexistrinrthermarket,rBuckleyrandrStetler.rIfrtheyrmerge,rtheyrwillrhaverfixedr
costsrofr$140,000,rmarginalrcostsrofr$50,randrarmarketrsharerofr6rpercent.rTherpricerelasticit
yrofrdemandrforrclinicrservicesrisr-0.22.rAssumerthervolumerofrpatientsratrtherprofit-
maximizingrpricerisr24,600.rThermergedrfirm'srprofitsrwillrber-rCORRECTrrANSWER-
$321,250
Confrontedrwithrthersamerunitrcostrdata,rarmonopolyrproducerrwillrcharge:r-
rCORRECTrrANSWER-arhigherrpricerandrhaverarhigherrprofitrthanrarcompetitiverfirm.
Demand-sidermarketrfailuresroccurrwhenr-rCORRECTrrANSWER-
demandrcurvesrdon'trreflectrconsumers'rfullrwillingnessrtorpayrforrargoodrorrservice.
Generallyrspeaking,rifrarfirmrfacesrdecreasingraveragertotalrcostsrofrproductionrthroughoutrit
srentirerrangerofroutput,rthenr-rCORRECTrrANSWER-therfirmrisrarnaturalrmonopoly
Healthcarerorganizationsrtypicallyrhavermarketrpowerr-rCORRECTrrANSWER-
a.rbecausertheyrhaverarlimitedrnumberrofrcompetitors.
b.rbecausermanyrhealthcarerproductsrandrservicesrarer"experience"rgoods.
c.rbecauserregulationsrlimitrwhorcanrcompeterwithrthem.
d.rAllrofrtherabove.
Ifrmanyrpeoplerinrarcommunityrgetrflurshots,rtherwholercommunityrbenefits,rincludingrthosert
hatrdidrnotrgetrflurshots.rTherefore,rnotrenoughrpeoplermayrdecidertorgetrthershots.rThisrisron
erillustrationrofr-rCORRECTrrANSWER-demand-sidermarketrfailure.
Ifrproductionrcausesranrexternalrcostrandrthersupplyrincludingrtherexternalityrisrgivenrbyr13P
=Q13P=Q.rWhatrisrthersociallyrefficientrlevelrofrofrproductionrifrdemandrisrQ=30−12PQ=30−
12P?r-rCORRECTrrANSWER-12
Ifrproductionrcausesranrexternalrcostrandrthersupplyrincludingrtherexternalityrisrgivenrbyr13P
=Q13P=Q.rWhatrisrthersociallyrefficientrpricerifrdemandrisrQ=30−12PQ=30−12P?r-
rCORRECTrrANSWER-36
Inrarmonopolisticallyrcompetitivermarket,rtherlargerrthernumberrofrfirmsrandrthersmallerrtherd
egreerofrproductrdifferentiation,rther-rCORRECTrrANSWER-
morerelasticrisrthermonopolisticallyrcompetitiverfirm'srdemandrcurve,rresultingrinrarsmallerr
markuproverrMC.
