# Analytic Critique on health insurance

Dec 14th, 2015
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Economics
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Question description

1. Consider the following information on Betty’s demand for visits per year to her health

clinic, which is based upon the fact that her insurance does not cover clinical visits (that is, based upon a 100% coinsurance rate):

 Price Quantity \$60 5 \$50 6 \$40 7 \$30 8 \$20 9 \$0 10

a.   Betty has been paying \$30 per visit (V).  How many visits does she "consume" per year? Draw her demand curve.

b.   Suppose now that her insurance company institutes a 70% coinsurance feature (that is, Betty pays 70% of the price of each visit).  Show what happens to the demand curve.  What is Betty’s new equilibrium quantity?

c.   Appraise this statement: Compared with a 70% coinsurance rate as in part (b), Betty’s price elasticity of demand would be even higher if the coinsurance rate was 60%.  (No calculations are needed to answer this question, so don’t calculate elasticity!)

2. Appraise this statement: A price ceiling on physician fees that is below the equilibrium market price would result in a reduction in social welfare.  HINT: Include the concepts of consumer surplus, producer surplus and deadweight loss in your answer.

4. Suppose that Norton’s income is \$70,000 per year.  He can spend it on healthcare visit

(V) or on all other goods (OG).  The price per V is \$200, and the price per OG is \$50. a.   Draw Norton’s budget constraint (put V on the horizontal and OG on the vertical axis). Using indifference curves, show Norton’s optimum if he buys 1360 OG per year.

b.   Suppose that Norton’s falls to \$50,000 per year, and that in response he decreases his consumption of V by 2.  Show the new equilibrium point on the graph. What is his income elasticity of demand for V?

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