1. The marginal cost pricing model calculates a markup over marginal costs using
ID: 1180373 • Letter: 1
Question
1. The marginal cost pricing model calculates a markup over marginal costs using estimates of
the price elasticity of demand. Will any other pricing strategy result in higher profits?
2. Price discrimination requires the ability to distinguish customers who are the most pricesensitive
and the ability to prevent arbitrage (resale of your products by customers who buy
at low prices). What attributes of healthcare products make these tasks easy to do?
3. Describe some healthcare situations in which an agent has taken advantage of a principal.
Now describe some healthcare transactions that have not taken place because of fears
about asymmetric information.
4. What are some strategies for reducing adverse selection in insurance markets? What sorts
of problems do these solutions cause?
Explanation / Answer
The marginal cost pricing model calculates a markup over marginal costs using estimates of
the price elasticity of demand. Will any other pricing strategy result in higher profits?
hedonic pricing theory allow modeling of the equilibrium pricing function as the marginal cost of an additional housing unit plus a markup that varies inversely with the elasticity of demand. Useful information about demand elasticity at a given point on the envelope function can be recovered from the hedonic regression and limited information on marginal costs. In particular, the elasticity of the envelope with respect to any characteristic such as interior area provides information on the elasticity of demand. Relative price elasticities (i.e., elasticities that vary from a base value in a known way with interior area, unit type or neighborhood characteristics) can be computed from the elasticity of the hedonic envelope
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