The viatical settlement industry enables terminally ill consumers, typically HIV
ID: 1123262 • Letter: T
Question
The viatical settlement industry enables terminally ill consumers, typically HIV patients, to borrow against equity in their existing life insurance contracts to finance their consumption and medical expenses. The introduction and dissemination of effective anti-HIV medication in 1996 reduced AIDS mortality, extending patients'lives and hence delaying when the viatical settlement industry would receive the insurance payments. However, viatical settlement payments (what patients can borrow) fell more than can be explained by greater life expectancy. The number of viatical settlement firms dropped from 44 in 1995 to 24 in 2001. Soodal. (2005) found that an increase in market power of viatical settlement firms reduced the value of life insurance holdings of HIV-positive persons by about $1.0 billion. When marginal cost rises and the number of firms falls, what happens to Cournot equilibrium price? Let the market demand curve have a constant elasticity of throughout. When marginal cost, MC, rises and the number of firms, n, falls, the Cournot equilibrium price MC decreases because Cournot firms maximize profits such that p= increases because Cournot firms maximize profits such that p MC Oc. MC increases because Cournot firms maximize profits such that p decreases because Cournot firms maximize profits such that p= MC ( E. remains unchanged because Cournot firms maximize profits such that p = MR. Click to select your answerExplanation / Answer
We know that P = MC x (Ned / Ned + 1)
N = number of firms and ed = elasticity
Find that
MC = P x (Ned + 1/Ned)
MC = P x (1 + 1/Ned)
This gives P = MC/ (1 + 1/Ned)
When MC is increasing, price is also increasing according to the given rule
Option C is correct
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