Question

In Africa, the continent where the polio epidemic has been most difficult to control, international relief efforts aimed at disease eradication often work against a backdrop of civil unrest and war.  In some countries, temporary cease-fire agreements must be negotiated to allow vaccination and prevent serious outbreaks from occurring.  During peacetime and during war, low incomes make paying for the vaccine a real problem among the poor.  To make the oral polio vaccine more affordable, either consumer purchases (demand) or production (supply) can be subsidized.  Consider the following market demand and market supply curves for a generic oral polio vaccine:

Q_D     =  24,000 - 2,000P                (Market Demand)

Q_S     =  -4,000 + 1,500P                (Market Supply)

where Q is output measured in doses of oral vaccine (in thousands), and P is the market price in dollars.

1. Find the current equilibrium price and quantity in this market.
2. Find the equilibrium price and quantity in this market if the government offers a $7.00 per unit subsidy for providers of the vaccine.

c.   What will happen to the price buyers pay per dose of the vaccine as a result of the subsidy?

d.   What price will providers actually receive (net price) per dose yard after the subsidy?

e.   How much will this subsidy cost the government?

f.    Now suppose the government decides on a different policy. Calculate the equilibrium price/o\

tput solution after the institution of a voucher system whereby consumers can use a $7.00 voucher to supplement cash payments.

g.   What will happen to the net price buyers pay per dose of the vaccine as a result of the vouchers?

h.   What price will providers actually receive per dose after the vouchers?

i.    How much will this system of vouchers cost the government?

j.    Discuss the differences in these two approaches to helping solve the polio epidemic.

Answer 1

Answer:

Given that:

In Africa ,the continent where the polio epidemic has been most difficult to control,international relief efforts aimed at disease eradication often work against a backdrop of civil unrest and war.

(a)

Setting QD = QS,

24,000 - 2,000P = - 4,000 + 1,500P

3,500P = 28,000

P = 8

Q = - 4,000 + 1,500 x 8

= - 4,000 + 12,000

= 8,000

(b)

Subsidy increases supply by $7 and supply curve shiftts rightward. New supply function is

QS1 = - 4,000 + 1,500 x (P + 7)

= - 4,000 + 1,500P + 10,500

= 6,500 + 1,500P

Setting QD = QS1,

24,000 - 2,000P = 6,500 + 1,500P

3,500P = 17,500

P = 5 (Price paid by buyers & market price)

Q = 20,000 - 2,000 x 5

= 20,000 - 10,000

= 10,000

(c)

Price paid by buyers decreases  by (8 - 5) = $3

(d)

Price received by sellers = 5 + 7 = $12

(e)

Cost of subsidy = $7 x 10,000 = $70,000