Exercise 5 discusses a short-run equilibrium in the health care market. With entry and exit into and from the market, graph and discuss the long-run equilibrium.

Exercise 5

Assume that in Figure 12.4, so many providers entered the health care market that individual demand curves fell below the average cost curves. Draw the new equilibrium.  What would happen to short-run profits in the health care market?

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Price P TR P2 TR2 Firm total revenue (TR) with no entry Firm total revenue (TR2) after entry MC D D MR2 MR 0 Q2 Q Quantity Figure 12.4 Impact of Entry of Alternative Providers into a Monopolistic Market