Question

The demand and supply curves of physician service is given by the equations -- Demand curve: Q_d= 500 – 3.0 P and Supply curve: Q_s = -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

Answer 1

We have demand function Q_d= 500 – 3.0 P and Supply function: Q_s = -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