Suppose that, as part of an expansion of its State Care health system, a state government decides to offer a \(50 subsidy to all people who, according to their physicians, should have their own blood pressure monitoring devices. Prior to this governmental decision, the market-clearing price of blood pressure monitors in this state was \)50, and the equilibrium quantity purchased was 20,000 per year.

(a) After the government expands its State Care plan, people in this state desire to purchase 40,000 devices each year. Manufacturers of blood pressure monitors are willing to provide 40,000 devices at a price of $60 per device. What out-of-pocket price does each consumer pay for a blood pressure monitor?

(b) What is the dollar amount of the increase in total expenditures on blood pressure monitors in this state following the expansion of the State Care program?

(c) Following the expansion of the State Care program, what percentage of total expenditures on blood pressure monitors are paid by the government? What percentage of total expenditures is paid by consumers of these devices?

Step by step solution

01

Step 1. Given Information.

The Price of blood pressure monitors is $50.

The equilibrium quantity purchased is 20,000 per year.

02

Part (a). The out-of-market price for consumers.

After expansion, the price per device is $60

The subsidy offered by the government is $50.

The out-of-pocket-price is,

= $(60-50)

=$10.

03

Part (b). The increase in dollar amount,

The dollar amount for an increase in total expenditure is,

= ( Total cost before government subsidy) - (Total cost after government subsidy)

= ($60*40,000) - ($50*20,000)

=$ 2.4 million - $1 million

= $ 1.4 million.

04

Part (c). The percentage paid by consumers of the device.

The percentage of total expenditures paid by the consumers of the device is,

$$\begin{gathered} =\frac{TotalGovernmentSubsidy}{TotalCost}\times 100 \\ =\frac{\$2million}{\$60\times 40,000}\times 100 \\ =\frac{\$2million}{\$2.4million}\times 100 \\ =83\% \end{gathered}$$

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