Features of Covid-19 Vaccine and the Marginal Rate of Substitution (MRS)

Question 1 (5 marks)
Let’s say that the price elasticity for a pharmaceutical product is -0.25 among low-income patients and -0.05 for all other income group patients. Let’s also say that total consumption for this product is 200,000 scripts per year for low-income patients and 100,000 scripts per year for other patients. 
A pharmaceutical company is considering increasing the price patients pay by 10%
(a) What will be the impact (in percentage terms) on pharmaceutical consumption among low income and other income patients. (2 mark) 
(b) If the original price for the product was $10 for low income patients and $30 for high income patients, what will be the impact of the 10% price increase on total revenue of the pharmaceutical product? (3 marks)
Question 2 (5 marks)
The effectiveness of vaccinations in preventing the Covid-19 is well established.
(a) What are the features of Covid-19 vaccine that imposes externalities and explain the concept of externality? (2 marks)
(b) Explain whether these are:
a. positive or negative externalities? (1/2 mark)b. production or consumption externalities (1/2 mark)
(c) In a supply and demand diagram, explain why there will be an underconsumption of covid-19 vaccines without government intervention.  (2 marks)
 Question 3 (5 marks)
The following table provides incomplete information on the costs of producing diagnostic imaging tests.  It uses two inputs to produce its outputs: capital and labour.  The fixed capital costs reflect the monthly leasing cost for the diagnostic imaging machine and the variable labour costs reflects the wages and hours worked by staff.
Assume that the firm is operating in a perfectly competitive market. Also assume that its fixed costs are sunk costs (i.e. it cannot recuperate these costs even if it decides to leave the market.
Quantity produced Fixed cost Variable cost Total cost Average total cost Average variable costs Marginal cost0 25 0  1 25 35  2 25 60  3 25 80  4 25 95  5 25 105  6 25 125  7 25 155  8 25 188  9 25 226  10 25 280  
(a) Complete all empty cells in the table above (1 mark).
(b) Provide a brief explanation of why the marginal costs could exhibit the pattern you observe in part (a). (1 mark)
(c) Add three columns to the table above headed: (i) marginal revenue; (ii) total revenue; and (iii) profit.  If the market price was $39, complete all new columns in the table over the output range of 0 to 10 (1 mark)
(d) If the market price was $39, what would be the optimum level of production for the firm? Why? (2 marks).
HINT: It may be easier to cut and paste the above table into a spreadsheet, complete your answers and then cut and paste the table back into your assignment document. 
 Question 4 (5 marks)
The indifference curve below shows Abby’s preferences between massage and physiotherapy.  

(a) Briefly describe what is meant by the marginal rate of substitution (MRS) between two goods. (1 mark)
(b) If Abby has a budget of $2000 to spend on these two goods and the price of physiotherapy is $80 an hour and the price of massage is $100 per hour, show the budget constraint on the diagram and estimate how much of each service Abby will consume. (2 marks)
(c) Imagine Abby purchases private health insurance and the annual premium costs $200. This implies that she now only has $1800 ($2000-$200) to spend. Her private health insurance fund will subsidise her physiotherapy by $20 per hourly session and her massages by $10 per hourly session.  i. Use the diagram to explain what would happen to Abby’s budget constraint (1 mark).ii. Under the new budget constraint, would Abby be able to obtain a higher level of utility compared to indifference curve 1? (1 mark)
 Question 5 (5 marks)
Suppose that a perfectly competitive market is characterised by the following demand and supply schedules:QD = 500 – 5P (demand schedule)QS = 50 + 10P (supply schedule) 
Where QD represents the quantity demanded, QS represents the quantity supplied and P is the price of the service.
i. Solve for the equilibrium price and quantity using the demand and supply schedules above. (2 marks)ii. Draw a supply and demand diagram that clearly labels the axis, supply and demand schedules and the equilibrium point. (1 mark)iii. Explain why the equilibrium point is the most efficient point of consumption and production (2 mark).
HINT: at the equilibrium, QD = QS