Question

The demand for medical treatment is Q= 50 - P, where Q is the quantity demanded of the medical treatment and P is the out-of-pocket price. The list price of this medical treatment is $10.

1. How much of the medical treatment would an individual who has no insurance purchase? Please show your work

2. How much of the medical treatment would the same individual but if they enrolled in a plan that had a 50% coinsurance rate? Please show your work

3.Calculate the social loss the occurs from going from being uninsurance to acquiring the health insurance with a 50% coinsurance rate. Please show your work

Answer 1

1. Putting the listed price ($10) of medical treAtment in the demand function, we get:

Q = 50 - 10 = 40 medical treatments

2. With co-insurance of 50%, the effective list price becomes $5. Therefore, post co-insurance, we get

Q= 50 - (50% X 10) = 45 medical treatments

3. Social loss = Deadweight loss = Area of the triangle (ExE₁) = 1/2 X Base X Height

=1/2 X 5 X 5 = $ 12.50 (also geometerically verifiable using angles sum property of triangle and the theorem stating that area of a triangle between the same parallells using the same base as that of the parallellogram is half the area of parallellogram, angles - sides relationship in a right angled isoceles triangle)

Illusrated below: