Suppose that there’s only one type of medical care | Online Assignment Help: +1 (857)-330-4622

Suppose that there’s only one type of medical care

Suppose that there’s only one type of medical care 1. Suppose that there’s only one type of medical care ( office visits ) and that each visit costs $20. Consider now an insurance policy with a $100 deductible that pays for 80 percent of the consumer’s medical costs after that. The price schedule confronting that consumer has a step in it at a quantity (five visits) such that total spending (price x quantity) equals the amount of the deductible($100). Draw such a price schedule. Now draw a consumer’s demand curve that intersects the price schedule at two visits (on the top step), at five visits (somewhere in the vertical portion of the price schedule), and at seven visits (on the lower step). Question: What is the optimal quantity for this patient to consume: two visits, give visits, or seven visits? Why?2. What would happen to demand curves for medical care if consumer income increased? (Don’t forget the effects of income on consumption of health-affecting commodities such as running shoes, cigarettes, fatty foods, automobile air bags, etc.)3. Draw a utility of income curve for consumers who are(a) risk-neutral. How would its shape (i.e. marginal utility of income) differ from Figure 10.3?? (5 points)(b) risk-loving. How would its shape (i.e. marginal utility of income) differ from Figure 10.3?? (5 points)4. Sally is a UT student and an athlete on the Longhorn gymnastics team. She has $22,500 in annual income and her utility function is U = I½. In any given year she faces a 25% chance of a serious sports injury. If the injury happens, medical expenditures for Sally will be $12,500. A health insurance company offers a policy that will cover all medical expenditures due to sports injuries at the premium of $4,000 per year.(a) What is Sally’s expected utility without health insurance?(b) What is the actuarially fair premium? What is the loading fee in this case?(c) What is Sally’s maximum willingness to pay for health coverage?(d) What is Sally’s risk premium? Will she buy insurance?(20 points, 5 points each)5. In 1994 the state of Tennessee created a program to provide health insurance to cover all people who could not afford health insurance or were too ill to qualify for private insurance. By 1999, the costs of the program had grown so much that the state began cutting benefits, tightening eligibility, and cutting its payments to physicians. Explain why this outcome was predictable. (5 points)6. Each individual faces a 10% chance of contracting muscular back pain. Assume that back pain can only be treated by aggressive physical therapy. Physical therapists will provide as many visits as demanded for $120 per visit.(a) Once an individual is diagnosed with the problem, his demand curve for back pain treatment (physical therapy session) is represented by the following formula:Q = 40 – ¼ * Pwhere P is the price of an office visit and Q is the quantity of office visitsdemanded. Draw the demand and supply curves for back pain treatment. Clearlylabel your axis. What is the equilibrium quantity and price of physical therapy visits? How much will he/she spend on treatment for back pain? (10 points)(b) Now assume that individuals can buy an insurance policy at the beginning of the year before they know whether they will have muscular back pain. The insurer will pay for physical therapy sessions (without copayments or deductibles) for people who are diagnosed with the problem. How many physical therapy visits will the insured people have when they have back pain? How much will the insurance company have to pay for each person with back pain? (5 points)(c) What is the dead weight loss associated with full health insurance? Show it on your graph in part (a). (5 points)(d) Assume economy of risk-averse individuals with demand functions similar to the one described in part (a). Will insurance, which provides full coverage, arise in this market? Explain your answer (if yes, then quote the actuarially fair premium; if not, explain why not). (10 points)7. Suppose a study found that the elasticity of demand for hair loss treatment visits was -0.96 and that the elasticity of demand for asthma treatment visits was -0.05. You are in charge of setting coinsurance rates for an insurance company’s policies. For which type of treatment would you set a higher coinsurance rate if your only goal is to reduce the moral hazard problem? (10 points)