Now, suppose that all consumers have health insurance. Health insurance allows consumers to see the doctor...

Now, suppose that all consumers have health insurance. Health insurance allows consumers to see the doctor at half price (ie- there is 50% coinsurance

Suppose that the market for doctor visits can be characterized by the following supply and demand equations:

Q = 300 - P
Q = 2P

10.9.

Problem Set #5 - Part II - 10.9 (I)

What is the total cost to the insurance company?

		A. $7,200
		B. $12,000
		C. $14,400
		D. $22,600
		E. $28,800

Solutions

Expert Solution

Demand Equation: Qd = 300 - P ...........(1)

Supply Equation: Qs = 2P ...........(2)

50% coinsurance can be interpreted as that the price for the consumer has decreased by 50%

Therefore new demand equation : Qd1 = 300 - 0.5P ........(3)

Solving equation (2) and (3)

2P = 300 - 0.5P

Therefore P = $120

Q=2*120 = 240

Total Revenue received by Doctors = 240 * 120 = $28800

Out of $28800, 50% will be paid by consumers and remaining 50% will be paid by insurance company

Therefore, the cost to the insurance company = 0.5 * 28800 = $14400

Rahul Sunny answered 1 year ago

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