1. This question asks you to consider the market for vitamins in the United States. For this question, please assume that there are many small vitamin manufacturers in the U.S. market, so that the market is perfectly competitive.
a) Begin by depicting the market for vitamins in long-run equilibrium. Using two diagrams, one to represent the market for vitamins, and a second to represent the costs of a typical vitamin manufacturer, illustrate the current price, quantity and profits of a typical vitamin manufacturer. Explain why you have drawn the curves as you did.
b) Suppose that the recent health care reform includes a provision providing substantial insurance premium discounts for any U.S. citizen who takes a daily vitamin. Show how such a mandate affects the short-run market equilibrium, price, and profits of a typical vitamin manufacturer. Using one diagram for the vitamin market and a second for a typical firm.
c) Will the scenario you have described in part (b) be a stable long-run equilibrium? Why or why not? Once again using separate diagrams for both the industry and a typical firm, illustrate the new long run equilibrium for the vitamin market.
d) To avoid the possibility you discuss in (c), the vitamin industry has proposed a licensing scheme. Only licensed vitamin manufacturers will be allowed to sell vitamins in the United States, and the number of licenses available will be limited. How would such a licensing requirement affect your answer to part (c)? Why?
2. The Centro Internacional por el Mejorimiento de Maiz y Trigo (CIMMYT) is a research institute which breeds improved varieties of wheat and corn. Its purpose is to contribute to solving the problems of hunger and poverty in the world.
a. Suppose the market for wheat is in long-run equilibrium. Using graphs and words, show the equilibrium in this market. Show the price of wheat, quantity produced, both by the typical firm and for the market as a whole. Show profits for the typical firm.
b. Now, suppose that CIMMYT introduces a superior new variety of wheat. It gives higher yields per acre, and is resistant to common pests. Show the immediate effects of the availability of this new variety on the cost curves of a farmer who adopts it. Assume that in the first year only a few farmers adopt it. Show the effects on price, on quantity produced (in total and for each firm). Show the effect on profits, both for adopters and non-adopters.
c. What would change to bring the market back into equilibrium? Show what would happen to price, quantity (in total and for each firm), and profits.
d. In the new long-run equilibrium, profits for wheat farmers are zero. Does this mean the money invested in CIMMYT (which is funded by governments) in developing the new variety is wasted? Explain.
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