# An individual’s demand for physician office visits per year is Q = 10 – (1/2

$15.00

An individual’s demand for physician office visits per year is *Q *= 10 – (1/20)*P*, where *P *is the price of an office visit. The marginal cost of producing an office visit is $120.

- If individuals pay full price for obtaining medical services, how many office visits will they make per year?
- If individuals pay 25% of the bill for each office visit, how many office visits will they make per year?
- If, instead of the 25% coinsurance, what happens if individuals must pay only a $20 copayment for each office visit, how many office visits will they make per year?
- In which case in the inefficiency larger? Explain

Assume Lily currently has $50,000 which she can spend on “medical care” (M) or “all other goods” (G). If the price of medical care is approximately P_{M }= $200 per visit, while the “price” of a unit of “all other goods” is P_{G}=$100. (NOTE: for simplicity, you can use revenues of 500 and prices of P_{M }= $2 and P_{g }= $1). Assume Lily’s utility function over M and G is given by U = M*G.

- Calculate how much medical services Lily will buy if she does not have any medical insurance. Show this using an indifference-curve/budget line graph.
- Now assume Lily has insurance that provides her with 50% co-insurance. Calculate how much medical services Lily will buy with her co-insurance. Show this using an indifference-curve/budget line graph. Be sure to illustrate the income and substitution effects of her co-insurance

Use the following graph for a Bob’s utility maximizing decision between “all other goods” and “medical care” in the absence of any insurance.

- Now, suppose that the federal government provides Bob with insurance in which he pays 25% coinsurance for medical care. On the graph illustrate the new budget constraint (with numerical intercepts) and show a new combination of Medicine and all other goods.
- On the graph, show and discuss the income and substitution effects (are these positive or negative and why) of such a grant.