Question

(a) The New and Improved Health Insurance plan picks up 70% of annual medical costs over and above $200 (called the “deductible”); i.e. after spending $200 on medical care, the cost to the buyer drops by 70%.  With income on the y-axis and medical care on the x-axis, draw the budget constraint of a healthy individual (H) and a sick individual (S), both having the same income.

                        (b) Sketch the indifference curves of two such individuals.

(c) Show that with the deductible, individual H is better off demanding less medical care and individual S is better off demanding more medical care.

Answer 1

Agraphical representation of the budget constraint of a healthy individual (H) and a sick individual (S), both having the same income

Where ICH = Indifference curve for individual H(Health)

              ICS = Indifference curve for individual S( Sick)

              BLS = Budget line for individual s

               BLH = Budget line for individual h

From the above graph we can see that the indifferent curve of the health individual is a t higher position than that of the sick person. The demand for medical care for individual H IS less than that of individual S at their point of equilibrium x and y