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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.

1. If individuals pay full price for obtaining medical services, how many office visits will they make per year?
2. If individuals pay 25% of the bill for each office visit, how many office visits will they make per year?
3. 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?
4. 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.

1. 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.
2. 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.

1. 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.
2. On the graph, show and discuss the income and substitution effects (are these positive or negative and why) of such a grant.