1. Draw a supply-and-demand diagram that represents the health care market. Illustrate and explain the effects of Medicaid in the health care market. Separate the consumers of health care into two groups: poor and non-poor. The poor are eligible for Medicaid, which offers health care services to the poor free of charge. First, show the price of health care, quantities of health care available to the poor and the non-poor without Medicaid. Then, show the price of health care, quantities of health care available to the poor and the non-poor with Medicaid. Clearly explain and illustrate how the price of health care, the quantities of health care available to the poor and to the non-poor change.
2. You are sitting on an advisory board deciding whether to legalize the market in which people are free to buy and sell human kidneys.
(a). Draw a supply-and-demand diagram to illustrate the organ shortage problem. Show how legalizing the kidney market could alleviate the shortage problem. [5 pts.]
(b). Provide an externality argument that it may not be socially optimal to legalize the kidney market. Illustrate your answer with the supply-and-demand diagram and support it with examples or hypothetical scenarios.
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