Question

In: Economics

The demand and supply curves of physician service is given by the equations -- Demand curve:...

The demand and supply curves of physician service is given by the equations -- Demand curve: Qd= 500 – 3.0 P and Supply curve: Qs = -100 + 1.8 P in absence of insurance. If insurance is introduced with 40% coinsurance, market price and quantity after the introduction of insurance would be

Price=$200 and Q=260

Price=$125 and Q=125

Price=$200 and Q=0

Solutions

Expert Solution

We have demand function Qd= 500 – 3.0 P and Supply function: Qs = -100 + 1.8 P

With 40% coinsurance, the price is reduced by 40% so we have Qd = 500 - 3 * 0.4P = 500 - 1.2P

New price is given by

500 - 1.2P = -100 + 1.8P

600 = 3P

P = 200

Q = 500 - 1.2*200 = 260 units

Select Price=$200 and Q=260


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