Aim for FiveMicroeconomics

Short free-response question

Flu shots

  • Unit 6
  • 5 points
  • About 12 minutes

You can use a calculator on this question, just like on exam day.

A shorter question with a few lettered parts on one situation, often built on a table, a payoff matrix or a given or described graph. You make claims, explain them, calculate a value, or describe a labeled graph and show a change on it. On the exam: Questions 2 and 3 of 3 in Section II; 5 points each, a quarter of the section score each. About 12 minutes suggested for each. Four-function calculator allowed.

The question

The market for flu shots in a city is perfectly competitive, with no government intervention. The market equilibrium is 400 thousand shots per year at a price of $30 per shot. Each flu shot also provides an external benefit of $10 to people other than the person who gets the shot, because it lowers their chance of catching the flu. There are no external costs.

Suggested time: 12 minutes

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Part (a)

2 points

Is the market quantity of flu shots greater than, less than, or equal to the socially optimal quantity? Explain.

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Part (b)

1 point

Describe a correctly labeled graph of the flu-shot market that shows (i) the market quantity, labeled Qm; (ii) the socially optimal quantity, labeled Qs; and (iii) the area of deadweight loss.

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Part (c)

1 point

Identify the per-unit subsidy that would lead the market to produce the socially optimal quantity.

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Part (d)

1 point

With the subsidy you identified in part (c), the quantity of flu shots rises to 450 thousand per year. Calculate the government's total spending on the subsidy each year. Show your work.

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