Question

C. what happens to the market equilibrium price and quantity exchanged if there is a reduction in supply (leftward shift in the market supply curve). Explain your answer.

Answer 1

(1st Question: C)

When supply curve shifts leftward (indicating a decrease in supply), demand curve remaining unchanged, equilibrium price rises and quantity falls. In following graph, D0 & S0 are initial demand and supply curves intersecting at point A with initial price P0 and quantity Q0. When S0 shifts left to S1, it intersects D0 at point B with higher price P1 and lower quantity Q1.

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(Question 2)

(A)

In following graph, D0 & S0 are initial demand and supply curves (when there is no coinsurance) intersecting at point A with initial price P0 and quantity Q0.

(B)

The 50% coinsurance will increase the demand for physician visit, shifting demand curve rightward to D1, intersecting S0 at point B. Equilibrium price increases to P1 and number of physician visits increases to Q1. Net price paid by consumers is equal to (P1 - P0) and portion of price paid by the insurer is (P0 - P2).

NOTE: As per Answering Policy, 1st 2 questions are answered.