Question

Your inverse demand curve for medical care is given by P = 220-20Q, where P is the market price and Q is the number of units you demand. Suppose the market price of medical care is $200 per unit, and you have an insurance plan that has a $2000 deductible and a coinsurance rate of .20 once that deductible is met.Use this information to answer parts a and b.

I. Graph the price line and your demand curve. On the graph, label the values of the x and y intercepts of the demand curve, the quantity where the deductible is met, the horizontal sections of the price line, and the point(s) where the demand curve intersects the price line.

II. Find the number of units of medical care that you will demand. Show all calculations that you performed in your analysis.

Answer 1

SOLUTION:-

(a)

From the question, we have inverse demand curve function given as

P=220-20Q

Based on the demand curve at P=0 we have,

Q=220/20=11

And at Q=0, we have p=220

Here,

$220 and 11 units are Y and X intercepts of the demand curve.

We have $2000 deductable and at market price of $200 per unit.

We will have $2000/$200, which is 10 units.

Here we substituting 10 units in the demand curve,

p=220-20Q

P=220-20*10

P=$20.

(10,20) would be the point at demand curve.

The graph plotted with above values

(b)

Once the deductable is exhausted, then the consumer would be paying only the coinsurance part which is 0.20 paid by consumer. He can get service equal to $40 in other words effective cost become $40/unit.

Demand curve we have

P=220-20Q

Substituting effective price is $ 40

40=220-20Q

20Q=220-40=180

The number of units demanded would be "9".

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