Question

20. Suppose health clinics form a competitive constant-cost industry. One day, the government unexpectedly opens a new clinic, which treats 800 patients a day for free.

a. In the short run, what happens to the number of patients served by private clinics? Does it rise or fall? By more or less than 800 per day?

b. In the long run, what happens to the number of patients served by private clinics? Does it rise or fall? By more or less than 800 per day?

please write in clear hand writing or type thank you

Answer 1

a) The opening of a new clinic represents a substitute to the private clinic so the people who are not able to afford the cost of the private clinic would choose to visit the government clinic.

The number of patients served by the private clinic will fall by less than 800 per day as due to the inelastic nature of the price elasticity of demand in the short run so all of the 800 patients will not change their demand in the short run.

b) In the long run,the nature of the price elasticity of demand is elastic which states that people can change their demand in the long run if there are better alternatives, therefore, in the long run, the number of patients served by private clinic will fall by more than 800 patients per day.Also, the quantity supplied by private firms decreases in the long run as the loss-making firms will exit the market which will further increase the demand for government clinics.