Suppose that the market equilibrium price for a basic medical check-up is $50, in a market in which there is no health insurance. To encourage more people to get a check-up, the local government mandates that the price of a check-up cannot be more than $40.
a. Is this a price floor or a price ceiling?
b. Draw a graph to illustrate the implementation of this government policy.
c. What happens to the number of check-ups in this market? Show this in your graph.
d. What happens to consumer surplus in this market? What happens to producer surplus? Show these changes on your graph.
e. Was the government's policy successful? What has happened to social welfare? Show this in your graph.
f. Can you think of a different policy that would likely be more successful at encouraging more people to obtain check-ups?
g. Is this a typical market? Is there any reason to suppose that producers of health care would respond differently to price regulation than, say, producers of umbrellas? What does the producer's responsiveness have to do with the cost of providing health care? What other factors might be involved?