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Solutions:

3.9 Elasticity:

a. The own price elasticity of demand is the percentage by which the quantity demanded willchange if the price of the item rises by 1%.

Short run own-price elasticity for demand = Proportionate change in quantity demanded

Proportionate change in price

= -0.4/1

=

Similarly, Long run own- price elasticity for demand = -0.75/1

=

c. Price rise due to tax = 5%

In short run,

Proportionate change in quantity demanded = Elasticity * Proportionate change in price= -0.4 * 5% = - 2.0%

The proportionate change in expenditure = 5 % - 2.0 %

= 3 %

In long run,

Proportionate change in quantity demanded = -0.75 * 5% = -3.75%

Proportionate change in expenditure = 5% - 3.75%

= 1.25 %

5.7 Market Equilibrium:

-0.4

-0.75


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a) Due to the sabotage of the oil pipeline, there was reduction in the supply of oil to the city ofKirkuk. Oil having an inelastic demand people started demanding oil through the tankers. Thus,the demand curve for tanker shifts to the right. In the short-run increase in supply is not possible.Hence, the price of oil tankers increased. The quantity of tanker services would be less in theshort run equilibrium, and in turn, higher the long run.

b) In the long run, the price would be higher than the original equilibrium, but lower than 39,000 perday.

c) Sunk costs are larger in transport of oil via pipeline as the initial investment is higher in layingdown the network of pipeline as compare to tanker.

As well if the long runs rates become fall lower than the average costs, one can scrap the tankerand recover some of the initial costs

d) Prices are more volatile in tanker services.

Due to lower sunk costs involved in tanker services, the entry / exits are easier. For example - Ifthe short run rate is below the average variable cost, the owner should lay up the tanker. Thechoice between operating and scrapping is a long run decision. If the long run rate is below theaverage cost, the owner should scrap the tanker.

6.2 Economic Efficiency:

a) The long waiting lists at urban hospitals are due to market ineffic iency in the way Pluto Healthoperates. Here the first condition for efficient markets i.e All users draw same marginal benefitisnt satisfied. With higher household incomes, people in urban areas draw more marginalbenefits from the same medical services than rural areas.

People staying in the urban areas have a high income and thus better purchasing power ascompared to other areas. So they can pay higher prices for treatment in hospitals, this haslead to the long queues. The rate at which the urban population is charged is same as that ofpeople in rural areas; this gives them higher buyer surplus.

b) The cost of living is higher in urban than rural areas but the professionals are offered samesalary. Other hospitals in urban have the capacity to pay their staff better because theycharge people according to the purchasing power in urban areas and not at the rural pricelevels. Thus, with higher costs of living professionals would prefer to work in rural areas with

lower marginal cost and same salary to draw larger profits. The 2nd condition of marketefficiency to have same marginal costs for all the sellers isnt getting satisfied.


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c) Advice to management 1) Higher salary to urban professionals

2) Charge higher for medical services in urban hospitals

6.5 Economic Efficiency:

For Fish

Japanese people draw more benefit from eating fish than meat hence the marginal benefit curve liestowards right as compare to the curve for other developed economies. Thus the fish will be priced atP2 (>P1 ) with quantity demanded D2 for economic efficient markets.

For Meat

Opposite is true for Meat with lower benefits the meat prices will be lower (P1) in Japan as compareto other developed economies.

b) Increase in Chinese demand for fish would raise the overall demand for fish in the world. But thesupply cannot be increased beyond certain levels (Assuming supply is inelastic). Therefore the priceof fish would go up. This in turn forces Japanese with comparatively low Marginal benefit to reducetheir consumption for fish because price commanded by fish would be more than their MarginalBenefit.

c) No, it is not likely that Chinese would consume the entire fish catch. There would be people acrossthe globe whose marginal benefit would be higher than marginal benefit derived by low benefit buyersof Chinese people for fish consumption; hence they would be ready to pay more. This would meanthat even though Chinese demand potentially can consume the entire wish catch but they wouldntpay for it.

Japan- Marginal Benefit

Developed Economies -

Marginal Benefit

Supply

P1

P2

D1 D2 Quantity demanded(tonnes)/year

Fish Price

($)/tonne

Developed Economies -

Marginal BenefitJapan - Marginal Benefit

Supply

P1

P2

D1 D2 Quantity demanded

(tonnes)/year

Meat

Price

($)/tonne


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7.4 Costs:

(a) No. Assuming that elevator breakdowns are independent, then the average rate of breakdownswill obey the law of large numbers. Shan On should be able to predict the number of breakdowns withrelatively less error when it maintains a larger number of elevators. Hence, it need not increase thenumber of service people by the same proportion as the number of elevators to be maintained.

(b) Economies of scale.

(c) Economies of Scope are experienced when total costs of operations are lower with joint thanseparate operations. Operating escalators and elevators is a case of economies of scope the as shan

on already provides services for elevators and the skill set required for maintenance of escalators isalso similar. Therefore minor training would make the human resource already available competent toperform both the operations.

8.8 Monopoly:

a) Indian law will hinder the ability of Private Televi sion Channels to differentiate itself fromDoordarshan. Private broadcasters will have to share their broadcasting rights with Doordarshan evenafter winning the bid. This would lead to change in the differentiating factors from exclusivity ofbroadcast to focus on factors such as better picture quality, expert talk shows etc.

Also lot of times the private broadcasters get a privilege that National broadcaster will show the matchafter a delay of 5 seconds

b) Law would reduce the amount that a private television would bid for broadcasting rights because

they wont have the exclusive right to broadcast the Indian cricket matches. This will divide theviewership, reducing the margins for private broadcasters hence bidding capacity reduces for them. Inthe long run private broadcasters will refrain from placing a bid because gradually their marginal costwill overpower marginal benefit they can derive from getting broadcasting rights.

c) Doordarshans market power relative to television viewers in the short run will increase by a rathersmaller proportion. In the long run as the private players will stop bidding, Doordarshan will be able toachieve a monopoly. Thus at this point profits will now be maximized and revenues will also increase.

As Doordarshan after the new regulation will enjoy the broadcasting rights irrespective of their bidsthey will be a monopoly in the market. Thus they will now enjoy greater market power. Hence therewill no longer be any bid process; rather the BBCI will now be price takers

d) Our prediction will be based on two market conditions the short-run and the long-run. In the shortrun the private players will still continue to bid, but the bids will decrease. Whereas in the long run theprivate players will stop placing bids.

10.4 Strategic Thinking


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13.4 Asymmetric Information:

a) The borrowers have better information of their repayment capacity than the lenders. This

asymmetric information results in imperfect information of the borrower.

b) A better investment grade by a credit rating agency generally ensures borrowers credit worthiness.

Borrowers want to convince potential lenders that they will repay their loan in time along with interestpayments and wont put money into excessively risky projects. A good ratings by credit rating agencyprovides platform for borrowers to market themselves in an effective manner and come induce moreinvestment.

c) The whole purpose of the ratings is to reduce the risks of information asymmetries for potentialinvestors. This is possible only when the grades given, actually correlates to the actual defaults. This

Provides authenticity to the reports and assists investors to make decisions.

14.1 Incentive & Organization

a) Doctors are subject to moral hazard in the situation when medical insurer pays the bills .Theycharge high rates/ prices for tests and other treatments to consumer as compare to situation when the

consumer himself pays the bill. The asymmetric information with insurer about the actual medicaltreatments and medical state of the customer establishes this moral hazard.

Also, doctors are aware of the fact that customers wont go in detail to check everything in the bill withinsurer paying..

b) Managed Health care limits the moral hazard of doctors that comes from overuse of health care,thus keeping the insurance company better off.

In managed care, covered patients could get treatment only from specific doctors and at specifiedfacilities. That is insurance companies form contracts with doctors depending upon services andprice. In the presence of such conditions doctors wont be able to charge more as compare to medicalinsurance.

c) Managed care is less costly than medical insurance since it limits the insured party to get treatmentonly form a specified list of doctors and facilities.

As the insurance providers now make contracts with hospitals and doctors on the basis of servicesand the price they offer which led to competition in the health care market resulting in lower prices.Medical insurance paid the providers on a cost basis. The more that was spent, the more that wasreceived. So health care providers competed in market along the lines of higher-quality services .Thisincreased the price of health care.

15.9 Regulation:

a) Public good is a good where use by one individual does not reduce availability to others. Thescientific formula for a new vaccine is a public good as the new vaccine would be non-excludable as


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well as for non-rival consumption.The usage of a scientific formula by one user doesnt limit the usageby another user.

b) Vaccination ensures immunity for the person who is vaccinated. So non-vaccinated people arebenefitted by a vaccinated person as the risk of getting infected is reduced. This benefit is notreduced by the number of people in the non-vaccinated community. Thus, it is a public good.

c) When GAVI started to purchase raw material in bulk, it experienced economies of scale which ledto reduction in marginal cost enabling it to supply more quantity at same price. Therefore, there was arightward shift in supply curve as shown below:

Where, D1 = Demand for VaccinesS1 = Supply of Vaccines before bulk purchaseS2 = Supply of vaccines after bulk purchasesP0 = Equilibrium price before the bulk purchaseP1= Equilibrium price after the bulk purchaseQ0 = Equilibrium quantity before the bulk purchaseQ1= Equilibrium quantity after the bulk purchase

Now, when GAVI started to give subsidies, consumers could buy more vaccination at current pricelevels. Thereby, it leads to a rightward shift in demand curve as shown below.

Price per Carton in Rupees


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Where, D1 = Demand for Vaccines before subsidyD2 = Demand for Vaccines after subsidyS1 = Supply of VaccinesP1 = Equilibrium price before subsidyP2 = Equilibrium price after the subsidyQ1 = Equilibrium quantity before the subsidyQ2 = Equilibrium quantity after the subsidy

Price per Carton in Rupees

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