Question

4. Suppose that doctors’ visits cost $20, and consumers each have an income of $100. Consumers spend all their income on doctors’ visits and a “composite good” that costs $1 per unit. (3 points each) a. Draw a graph to illustrate a consumer’s budget constraint. Put doctors’ visits on the horizontal axis, and be sure to illustrate the horizontal and vertical intercepts. (You can assume that doctors’ visits are perfectly divisible.) b. Suppose the local government is considering two health plans. Under plan V, the government will give out vouchers worth 2 free visits to the doctor. Under plan C, the government will give out four 50%-off coupons for doctors’ visits. c. Draw the new budget constraint the consumer faces under plan V. d. Draw the new budget constrain the consumer faces under plan C. e. For which local residents is the choice of plan V or plan C not likely to matter—the residents who are relatively healthy or those who are relatively sick? Combine some indifference curves with your budget constraints to illustrate your answer. f. If the residents who are generally healthy are offered a choice of plan, which are they likely to choose, and why?

Answer 1

E. Relative Sick people prefers both V and C equally as the indifference curve is tangent to that protion of budget line which is same for both V and C. As they use relatively higher visits to the doctor.

F. Relatively healthy people prefers 2 free vouchers. As they still get to buy $100 worth of composite goods which is not possible in case of 50% off coupons.

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