(1.) Assume that all firms want to maximize profits, and that the price mechanism is allowed to freely fluctuate based upon market supply and demand. Appraise this statement: A monopolist will charge a lower price and produce a higher quantity of a good than would be the case if the industry were more competitive, and will result in an increase in efficiency and in an increase in social welfare that would be true if the industry were more competitive. HINT: Include concepts of consumer surplus, producer surplus and deadweight loss in your answer.
(2.) A foundation is considering supporting a health-intervention project that has been proposed by a local community health center. The foundation will base its decision about whether or not to fund the project strictly by considering the project’s financial benefits and costs. The project costs are $2 million at project inception (Year 0) plus $1 million per year in Years 1, 2, 3, 4 and 5. The present value of project benefits is estimated to be $6 million. (“Year 0” means today, “Year 1” means one year from today, “Year 2” means 2 years from today, and so on.)
(a) At a 10% discount rate, should the foundation support this project, or should they reject it?
(b) Now suppose that the discount rate is 12%. Now should the foundation fund the project?