Question

The market demand for primary care visits is given by the inverse demand curve ?? = 400 – 8? and the inverse market supply is ?? = 40 + 4?.

a. Graph the market supply and demand and indicate the market equilibrium values for price and quantity.

b. Suppose that the consumers in this market are then provided health insurance that pays for all services after consumers pay a 40% coinsurance rate for every visit. On the same graph, graph the demand for primary care visits generated by this insurance plan. What is the market equilibrium price and quantity with a 40% coinsurance rate?

c. What is the dead weight loss of moral hazard under dental insurance? d. Explain briefly whether insurance makes the demand for health care visits more or less elastic and why

Answer 1

Solution:

Given data

Inverse demand curve Pd=400-8Q

Inverse market supply Ps= 40+4Q

a)

? =400 – 8?

?? = 40 + 4?

P = Ps

400- 8Q = 40 +4Q

12Q = 360

Q= 30

P = 400 - 8X30= 160

Without insurance

Equilibrium price = $ 160

Equilibrium quantity= 30

b)

With insurance:

Coinsurance rate = 40% =0.4

New demand function ,

0.4 P = 400- 8Q

P = 1000-20Q

Ps= 40 + 4Q

At equilibrium, P=Ps

1000- 20Q = 40 +4Q

24Q= 960

Q= 40

So

P= 40 + 4×40= 200

So with insurance

equilibrium price = $200

Equilibrium quantity= 40

Consumer will pay= 0.4×200= $80

c)

Dead weight loss= 0.5 × (40-30)×(200-80) =600

d)

Demand for health care curve will be less elastic becuase consumer will have to bear only a portion of the price change.

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