Question

In a neighborhood with 600 people, the market demand for a flu shot is

Q = 500 – 2P

where Q is the number of flu shots demanded and P is the out-of-pocket price of the flu shot.

1. Assume clinics will provide flu shots at a price of $70. How many people will get flu shots if it is not covered by insurance?

2. How many people will get a flu shot if insurance covers the shot and the customer only pays a $10 co-pay?

3. Briefly describe and quantify the moral hazard in terms of the price distortion and the social loss in this example:

4. Explain why the moral hazard can be justified in this case even though consumption exceeds the natural equilibrium quantity

Answer 1

Q= 500 -2P

Now, in part (a) of the question P= 70, and no insurance is given

Put 70 in the above equation, we get Q= 500 -2×70

Q= 500 -140 = 360

There were 600 people in total, only 360 will get flu shots

Therefore 240 will not get flu shots.

Now, in part (b) of the question P reduces to 10, and insurance is given

Put 10 in above equation, we get Q= 500 -2×10

Q= 500 - 2×10 = 480

Now 480 people will get flu shots

Therfore 120 people will not get flu shots.

In economics, moral hazard occurs when someone increases their exposure to risk when insured, especially when a person takes more risks because someone else bears the cost of those risks.In this price was more in early phase then consumers were low and when the price of shots decreases the no. Of patients demand increased due to surety of insurance.