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ECON 157 Study Guide - Midterm Guide: Graph Labeling, Competitive Equilibrium, DiscountingExam

Course Code
ECON 157
Study Guide

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Midterm # 2 Instructions
Economics 157: Health Economics –Spring 2016
Professor Handel
This midterm contains 5 questions, worth a total of 180 points. Questions 1 is worth 60 points,
questions 2 is worth 40 points, question 3 is worth 35 points, question 4 is worth 25 points, and
question 5 is worth 20 points.
This is a closed book and closed note exam. You are allowed to have a 3 X 5 index card with
notes (both sides) and that is it. If you use more than that, you will get no credit for the exam. Cal-
culators are allowed, but no laptops or tablets are allowed. You can use basic function calculators,
graphing calculators, or you can use your phone’s calculator. If you use your phone as a calculator
your phone must be in airplane mode, you should sit in the front of the classroom, and if you are
seen accessing anything besides your calculator during the exam your phone will be taken away for
the remainder of the exam.
The exam is 80 minutes in length and begins at 12:40 PM sharp and ends at 2:00 PM sharp.
When I announce that it is 2:00 PM, the exam is over and you must hand in your exam immediately
at that point. No exceptions are allowed, if you continue working after this point you won’t get any
credit for the exam, regardless of any excuses.
There are multiple questions and multiple parts to each question, with points for each sub-part
clearly listed. Partial credit on any sub parts will be extremely limited: the exam is structured to
have easier parts of questions first, so take care in answering those parts as they are often inputs into
later answers. The questions are split up into many parts so that each part represents partial credit
for the question on its own. Make sure to clearly circle, box, or indicate the final answer to each part.
In case you run out of room to answer any given section, there will be some extra blank pages
attached at the end of your exam to extend your answer. Clearly label within the exam where
you extend an answer to this extra space, and in that space clearly note the relevant question and
sub-part that you are answering.
Write Your Full Name Here:

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ECO 157: Health Economics Midterm 2 Professor Handel
Question 1 (60 points)
Consider the case of a competitive health insurance market, similar to what we studied in the graph-
ical framework in Week 4A and after. Assume that, as in the Aordable Care Act, the government
allows many insurers to compete (perfect competition) to oer the one kind of insurance contract
allowed (this is just the same as the framework we have discussed all along, starting in Week 4A).
Consumer demand for insurance is described by:
P= 120 2Q
Qmax = 60
As is typically assumed, demand represents both willingness-to-pay for insurance as well as how
much consumers value insurance from a social perspective.
Assume that marginal and average costs are characterized by:
MC = 80 Q
AC = 80 .5Q
Throughout all parts of this question, where possible, if you show a very clearly labeled graph but
don’t get the right numerical answer, you will get 50% of the possible points.
1. (5 points) Compute the competitive market price Peqm and quantity Qeqm outcomes in this
market (under the usual assumptions about copmetitive equilibrium we’ve maintained in

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ECO 157: Health Economics Midterm 2 Professor Handel
2. (5 points) Compute the socially ecient quantity of insurance Qef f , under the usual assump-
tions we maintain.
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