Mean: 114. Grade distribution: 70-88: C+, 89-99: B-. 100-109: B. 110-119: B+. 120-129: A-. 130-139: A. 140-150: A+.
(1) (0,[3], 7, 10) If two firms agree that one will sell only in California and the other one only in the rest of the country, that is illegal regardless of the two firms' initial market shares.
Answer. True. This is a per se violation of the Sherman Act.
(2) (0,[3], 7, 10) During the comment period specified for a new regulation in the Federal Register, anyone who submits a comment must register as a lobbyist first, for a nominal fee.
Answer. False. Anyone may comment, lobbyist or not.
(3) (0,[3], 7, 10) What is distinctive about a natural monopoly is that it is not enforced by government regulation.
Answer. False. What is distinctive is that it arises as a result of increasing returns to scale, not collusion.
(4) (0,[3], 7, 10) The Cournot equilibrium price for a duopoly might be either greater or less than the monopoly price.
Answer. False. It is always less than the monopoly price.
(5) (0,[3], 7, 10) The Becker model of regulation shows how the prices of two firms rise because of the interaction of their reaction curves.
Answer. False. It is about the political pressure generated by two interest groups, not about prices.
(6) (0,[3], 7, 10) What would have been the effect on the overall cost of childbirth in Bloomington if the new hospital had been approved?
Answer. It would have fallen, with the competition. I also gave credit for the answer that it would be unaffected because the new hospital would be for pain management. The article doesn't say that, and it wasn't true, in fact, but the article doesn't say what "specialty hospital" means.
(7) (0,[3], 7, 10) Does the failure of the Tiwari proposal show that the hospital industry in Bloomington is a natural monopoly?
Answer. No. It shows that the current hospital thought that there was indeed room for two hospitals and that it had to use political means to defeat the competition.
If Bloomington Hospital were a natural monopoly, then being bigger than an entrant, it would be able to profitably undercut the entrant's prices and drive it out of the market. Knowing that in advance, Dr. Tiwari would not try to enter. The very fact that Dr. Tiwari is trying to enter, and the fact that Bloomington Hospital feels it must fight him politically rather than in the marketplace, shows that the industry is not a natural monopoly.
When existing firms say that allowing new competition would drive up prices, be very skeptical. It does not matter whether there are high fixed costs. K-Mart has high fixed costs, but if K-Mart said that the city council should keep Wal-Mart from entering because then prices will rise, would you believe K-Mart? (8) (0,[3], 7, 10) Evaluate Mr. Sabbagh's principle of "Above All Else, Do No Harm." Is it a sound principle? Did he follow it properly?
Answer. No it is not sound. You should look at benefits as well as potential costs, and sometimes it is good to take risks. Also, he did not follow it properly, because his vote against the new hospital, actively preventing it from opening, might cause harm too.
(9) (0,[3], 5, 10) In the end, Mr. Tiwari built his hospital outside the city limits, in land controlled by the county government, not the city government. Why would the county government be more likely to support him than the city government? [Clue: think about the interests of the voters.]
Answer. Doctors live in town, and have a greater influence on city government than on county government.
When I ask why Monroe County would approve the hospital when Bloomington City did not, it is not enough to say that the voters are different. You should say why county voters would vote for the hospital and city voters would vote against it.
(10) (0,[3], 5, 10) What can you say about whether the merger would increase or reduce total surplus?
Answer. The elasticity is .7, so the merger raises total surplus.
(11) (0,[3], 5, 10) If the decline in average cost were 2% instead of 5%, would the two firms still merge?
Answer. Yes. The two firms could keep prices the same and save on costs, increasing their profits. If they raise prices, that must increase their profits even more.
The answer is not "Yes, by the same logic as in 11". That logic looks at total surplus, not the incentives of the two firms. Also, remember that in the end the courts decided that a merger would not be allowed just because it raised total surplus.
| %Price | ...................... | Elasticity of demand | ............................ | ............................ |
|---|---|---|---|---|
| Increase | 3 | 2 | 1 | .5 |
| 5 | .43% | .28 | .13 | .06 |
| 10 | 2.00 | 1.21 | .55 | .26 |
| 20 | 10.37 | 5.76 | 2.40 | 1.10 |
Answer. See past tests.
12. If I ask why the price where supply and demand intersect is the equlibrium price, the stable price we would expect the market to settle down to, it is a wrong answer to say that it is an equilibrium price because it maximizes surplus. It is true that the equilibrium price maximizes surplus, but that is the answer to a different question. It does happen that the equilibrium price maximizes surplus if there is no market failure, but that is not the reason it is the equilibrium; it is the reason a social planner would choose that price, but not why the market would settle down to it. To explain why it is the equilibrium, you have to explain why market forces lead to that price--- which then happens to be the surplus-maximizing price.
Similarly, if I ask you, "Why do firms choose prices equal to marginal cost in competitive equilibrium?" don't answer, "Because the firms want to maximize social surplus." They do, but that is not their objective. Rather, they are trying to maximize profit, no other price has higher profit, and if the firms were to charge more or less than marginal cost one of them could shift to a different price and increase his profit.
(13) (0,[3], 5, 10) Who would win from this law, and who would lose?
Answer. Under this law, firms are free to reduce wages if they add the new family leave policy. Firms that did not have it before chose not to have it because the employees did not value the policy as much as they would value extra cash wages. Thus, Employees with children who are at firms that do not offer the benefit now would win, and employees without children at those firms would lose. Firms that do offer the benefit now would win. Buyers of the products of the firms with higher costs would lose.
A law similar to this was passed by Congress and signed by President Clinton. It does not mean that employees are forced into leave without pay-- they are granted the option, even if the employer objects. Employers object because they then have to hold the job position open until that employee returns, and must train a temporary replacement. The inconvenience of this to the employer differs among employers, which is why some employers have always been willing to offer maternity leave, even before the federal law.
I assumed in my answer that the employer could not discriminate in pay between males and females, or between people likely to have children and people unlikely to (e.g., employees over age 50), and also could not discriminate in hiring. I gave credit for answers that assumed otherwise and explained well what would happen in that case. (14) (0,[3], 5, 10) What do you predict will happen to wages and employment?
Answer. It will fall. The value of wages will fall to the average employee at the newly regulated firms, and the cost of wages will rise.
(15) (0,[3], 5, 10) What do you predict will happen to producer surplus in this labor market?
Answer. It will fall-- there will be fewer workers, and those that remain will have lower surplus on average. That is because wages will fall
Hospital plan gets frown from council
Those voting no were : David Sabbagh, Mike Diekhoff, Chris Sturbaum, Chris Gaal and Tim Mayer. "I think it was the beginning of a powerful statement," said Dr. Owen Slaughter, chief of the medical staff at Bloomington Hospital, on Thursday. "The conversation needs to continue." If the five nay votes hold, the medical park will not move forward in its current form. The debate returns to council chambers at City Hall on Feb. 25. A final vote will be taken at that time. Until then, Tiwari said he'll be busy providing more information about his proposal and the larger health care issues behind it to council members. "We haven't given up," Tiwari said Thursday evening. If his specialty hospital proposal in Bloomington is turned down, however, he may try again somewhere else. Tiwari operates the Bloomington-based Pain Management Center of Southern Indiana, which has five locations. At the meeting Wednesday, hospital supporters stressed that their only opposition to the project was the inpatient beds. If Tiwari scratched the overnight beds from the project, there would be no resistance to the outpatient care. But Tiwari is not interested in eliminating the inpatient use, he said, calling it an integral part to the project. "Outpatient facilities are already here," Tiwari said, referring to seven facilities in Bloomington, some of which are partially owned by Bloomington Hospital. Council members voting against Tiwari's rezoning request said it offered no compelling reason for Bloomington to support a second inpatient facility in the city. Bloomington Hospital, which opposes another inpatient facility, is the only entity that allows overnight medical stays. Some on the council shared the fear of hospital administrators that such a facility would cut into hospital revenue and hurt its ability to provide services to the community. "The hospital will do OK. The question is what will happen to the community if this ( a specialty hospital) goes on?" Slaughter said, who is medical director of the emergency department. The guiding principle for councilman Sabbagh to vote against the project was an e-mail, one of many correspondences from the public he had received: "Above All Else, Do No Harm." Sabbagh said he was concerned what sort of impact a competing facility would have on the Bloomington Hospital and its ability to provide a number of services, including the ambulance and CHAPS Clinic for low-income county residents. He said he didn't want to see Bloomington become home to two weak hospitals instead of one strong one. While council members called the land-use portion of the project a "home run," they said the driver behind the debate was public policy. Many praised Tiwari for revising his original proposal — which had received approval from the plan commission — to preserve two-thirds of the site, near Ind. 37 and West. Tapp Road. With councilman Dave Rollo, who serves on the plan commission, raising awareness of the environmentally sensitive nature of the land, any future proposal to rezone it will need to include green space, said councilman Gaal. The 101-acre site is zoned quarry. Slaughter admitted on Thursday that Bloomington Hospital and opponents to the project did a disservice to Rollo by presenting another "piece of the puzzle" at the last minute. He credited Rollo for working toward the green space. An issue for some on the council that came out of Tiwari's preservation plan was shifting the cost of a future road to connect Tapp Road with Fullerton Pike to the public.
People who filled the council chambers Wednesday came to voice either support for the Bloomington Hospital or Tiwari. Patients of Tiwari said he helped them with their chronic pain like no one else could, including doctors at Bloomington Hospital. They asserted that his service, and more of it, is needed in the city. While Tiwari runs off-site facilities, he still practices pain management at Bloomington Hospital. Several hospital administrators said no one was questioning that Tiwari provided a valuable service. Instead of starting a 30-bed inpatient facility, perhaps he should increase his outpatient services, suggested Diekhoff, council president. Hospital staff and administrators agreed. "We're all very supportive of Dr. Tiwari doing whatever he wants to do and wherever he wants to do it. What we don't want, what is bad for the community, is for Tiwari to open a for-profit specialty hospital," Slaughter said. Whether his project is passed or not, Tiwari predicts at some point the Bloomington Hospital will have in-patient competition. "I guarantee you it will happen sooner or later," he said. Those who passed on the vote — Steve Volan, Jason Banach, Dave Rollo and Andy Ruff — said they wanted more time to sift through the stacks of statistics and resources given to them. Reporter Sarah Morin can be reached at 331-4363 or by e-mail at smorin@heraldt.com.