Question

Nurse practitioners have to be supervised by physicians. As a result, they were complements.

a. Suppose that an increase in malpractice insurance premiums raised physician costs. Show how this would affect the equilibrium price and quantity of physician services. On all graphs, label both the market (e.g., physicians or nurse practitioners) and the two axes.

b. On a new graph, show how the change in the physician market from part a above, will affect equilibrium price and quantity in the nurse practitioner market. Label everything clearly.

Answer 1

When there is an increase in the malpractice insurance premiums raised physician costs . This will decrease the supply of physicians. As a result, supply curve shifts leftward from S to S1.

Therefore, equilibrium price increases from P1 to P2. And equilibrium quantity decreases from Q1 to Q2.

This is shown in the figure below:

Now, it is mentioned that nurse practitioners and physicians are complements. Therefore, by increaase in the equilibrium price for physician , then , demand for nurse practitioners decreases. As a result, demand curve shifts from D1 to D2. Equilibrium quantity falls from Q1 to Q2. And equilibrium price falls from P1 to P2.

This is shown in the figure below: