Question

1. The demand function for hospital inpatient days in a local community is P = 4500 – 5Q, P is the price of the hospital inpatient day and Q is the number of hospital inpatient days demanded. Hospitals are able to supply inpatient days in the following supply function: P = 1500 + 5Q, P is the price of hospital inpatient day and Q is the number of hospital inpatient days per unit supplied. However, in this local community, one health insurer comes in and covers all of the people and represents the only purchaser of hospital services in the area. This health insurer behaves like a monopsonist, and negotiates with all hospitals in the area for a lower price of the hospital inpatient day. Therefore, hospitals have to supply less inpatient days due to loss of revenues. Hospitals supply function becomes: P = 1500 + 10Q, where P is the price of hospital inpatient day and Q is the number of hospital inpatient days per unit supplied.

1. Draw the market demand and supply curves.
2. Find the equilibrium price and quantity of inpatient day before the single health insurer comes in and takes over the demand.
3. Find the equilibrium price and quantity of inpatient day after the single health insurer comes in and takes over the demand.
4. Is this an efficient market? Calculate consumer surplus and producer surplus and deadweight loss.

Answer 1