Question

In: Economics

Healthcare Moral HazardAn individual's demand for physician office visits in agiven year is given...

Healthcare Moral Hazard

An individual's demand for physician office visits in a given year is given by, Q = 14 - 0.075P, where Q is the number of office visits and P is the out-of-pocket price paid by the individual for each visit. Assume the market price of an office visit is $150.

Use this information to answer the questions below.

Questions (4):

1. Without insurance, how many office visits would the individual make in one year?

NOTE: Enter a formula to calculate the number of visits, rounding your answer to the nearest whole number.  


2. Suppose the individual does have insurance and pays only a $40 copayment for each visit. How many office visits will the individual make in one year?

NOTE: Again, enter a formula, rounding your answer to the nearest whole number.  

3. What is the moral hazard and deadweight loss (DWL) associated with this individual having insurance? NOTE: Enter formulas in the respective boxes below.

Moral Hazard:

Deadweight loss (DWL):


4. Enter a formula to calculate the proportion of total expenditure on office visits (for this individual with insurance) that is deadweight loss.

Solutions

Expert Solution

1. Without insurance Q= number of visits will occur at the market price of an office visit=150$

inserting P=150$ in the demand equation, we get

Q=14-0.075P

Q=14-0.075*150=2.75 or 3 visits after rounding up.

2. Now supposing the individual only has to pay 40$ as copayment for each visit, his demand curve will reflect that the price he has to pay is only 40$

Inserting P=40 in the demand curve we get

Q=14-0.075P

Q=14-0.075*40=11

Therefore the individual will make 11 visits in a year.

3. Since he visited only 3 times before and he visits 11 times now, the moral hazard is 11-3=8 visits
The deadweight loss will be the previous social welfare-present social welfare=previous consumer surplus-(present consumer surplus-money that insurance company has to pay) (Since the producer surplus is 0 at a constant market price of 150)

Current consumer surplus= 0.5*146.67*11=1026.67 (186.67 is the demand price for the first visit,consumer surplus will be the area of the triangle from (0,40), (0,186.67) and (11,40)

Money the insurance company has to pay= 11*(150-40)=1210

Previous consumer surplus=0.5*36.67*3=55
So deadweight loss=55-(1026.67-1210)=238.33

4. Total expenditure on office visits=11*150=1650 and the percentage of it that is deadweight loss=283.33/1650=17.1717%

I don't know what the variable is supposed to be here so I don't know what the question means when it asks for formula,but I hope it's clear. Also I'm not sure what calculating moral hazard meant because it's not something you calculate(like it's just a problem, like adverse selection for example) but i'm assuming the number of extra visits a patient will do due to the insurance.

Rahul Sunny answered 2 years ago
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