Question

Assume healthcare is sold in discrete “units” in a competitive market, with the market price of healthcare equal to $100 per unit. Consider a patient whose health benefits (measured by her willingness-to-pay) from different quantities of healthcare are as follows:

       HC Quantity           Health Benefit ($)

                      1                                  $2500

                        2                                  $3300

                        3                                  $3600

                        4                                  $3800

                        5                                  $3850

                        6                                  $3875

                        7                                  $3880

1. How many units of healthcare would the patient demand if she were uninsured?

2. How many units of healthcare would the patient demand if she were covered by a health insurance policy that pays 90% of all medical expenses (i.e. a 10% coinsurance rate)?

Assuming healthcare prices are set equal to the costs of production, by how much does total economic surplus change between the scenario in part (a) and the scenario in part

Answer 1

a)

HC QUANTITY	TC	MC	HEATH BENEFIT	MB(marginal benefit)
1	100		2500
2	200	100	3300	800
3	300	100	3600	300
4	400	100	3800	200
5	500	100	3850	50
6	600	100	3875	25
7	700	100	3880	05

here when patient buy 4 units of HC, he/she gets a health benefit of $3800

but when patient buy 5 units of HC, he/she gets a health benefit of $3850

Thus, MC is greater than MB at 5 unit of HC.

But up to 4 units, MC< MB, so, the patient will purchase 4 units of HC.

b) when health benefit is 90% of all expenses

HC QUANTITY	TC	MC	HEATH BENEFIT	90%	MB
1	100		2500	2250
2	200	100	3300	2970	720
3	300	100	3600	3240	270
4	400	100	3800	3420	180
5	500	100	3850	3465	45
6	600	100	3875	3487.5	22.5
7	700	100	3880	3492	4.5

Thus again patient will buy 4 units of HC, as MC<MB.

change in an economic surplus of the patient is $20.(200-180).