Question

Suppose a consumer has income of $100 that she can spend on doctors' visits, which cost $20 each or "other goods," which we will represent with a composite good whose price is $1 per unit (i.e,the numeraire). (a) Illustrate her budget constraint The government is considering offering one of the following three health plans to con- sumers. Plan A will simply give everyone an additional $40 of income (perhaps through a tax cut). Under plan B, the government will give consumers vouchers that can be re- deemed for two free doctor visits. Plan C involves giving out fur 50% off coupons that can be used for doctors' visits. (b) Ilustrate the budget lines for each plan on your graph above. Use a different color or dashed vs. solid lines and label the lines A, B, and C clearly (e) Which plan will be preferred by someone who is really sick and needs a lot of medical care? Draw a couple of indifference curves for this type of consumer (d) Which plan will be preferred by someone who is quite healthy and does not go to the doctor often? Draw a couple of indifference curves for this type of individual.

Answer 1

In come M = 100 Price of doctor visits: 20 $ price of water goods = 1 $ a) Budget contrent in green ley 200 + 1 G = 100{B = no of doctor visits G = no of than goods constant it is graphically represented B) For plen A = we nene an addition at income of 40 $ so as total income becomes 100 + 40 = 140 $ Budget constraint = 200 + 1 G = 140 \r\n For plan B the feast a doctors visits are free so the we get constraint becomes 0.0 + 1 G = 100 when 0 lessthanorequalto 2 20(0.2) + G = 100 when 0 greaterthanorequalto 2 we have used '0.2' here because of one B act shot the a doctor visits are free so if a consumer 3 visits he will only fray for 3 - 2 -= 1 visit for plen c: 450 % off compone that used for visits so cost per visit