ProblemSet5(1)

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ECON 129: Health Economics Problem Set #5 BHT Question 11.1. True or False: When the price elasticity of demand for health care is zero, health insurance coverage induces no moral hazard. BHT Question 11.2. True or False: An insured patient who incessantly visits his doctor because he always thinks he is getting sick is an example of moral hazard. BHT Question 11.3. True or False: A woman who uses her fireplace only after she buys homeowner’s insurance is an example of moral hazard. BHT Question 11.4. True or False: A previously-uninsured man who enrolls in his workplace health insurance plan after being diagnosed with multiple sclerosis is an example of moral hazard. BHT Question 11.7. True or False: If a health insurance company could somehow monitor everything a customer does and thinks, it could create a full-insurance contract with no moral hazard. BHT Question 11.11. True or False: An all-you-can-eat buffet is a classic example of moral hazard, because a price distortion induces overconsumption. BHT Question 11.12. Consider Figure 11.10, which shows the locus of feasible contracts for the population of the nation of Pcoria. a. In which corner of this diagram (northeast, southeast, northwest or southwest) is utility highest for consumers? What prevents insurance companies from offering contracts in this corner? b. On you own version of figure 11.10, plot new points to represent where the market would be (i) a nationally mandated full insurance policy and (ii) an insurance ban. c. Would a nationally mandated full insurance policy be optimal for Pcoria? What about an insurance ban?

d. Suppose the devil approaches the newly elected President of Pcoria with an unusual bargain. He offers to magically eliminate moral hazard, but in return, Pcoria must forbid contracts that are more than half full. On a new version of this figure, draw a new locus of contracts that would be feasible if the President takes the devil’s bargain. e. Should the President take the devil’s bargain? Why or why not? f. The indifference curves in Figure 11.10 represent one possible set of preferences for Pcorian society. On a new figure, draw an alternative set of indifference curves such that the bargain is a good deal relative to the status quo. g. Which type of society is more likely to accept the devil’s bargain: one that is relatively risk- neutral or one that is relatively risk-averse? Explain why your answer makes intuitive sense. BHT Question 11.16. More fun with cost-sharing. A consumer’s demand for a medical service is: Q = 100 – P P , where P P is the out-of-pocket price she actually faces. She is considering four different insurance options: uninsurance, full-insurance, a 50% coinsurance plan and a copayment plan with a $25 copay. a. Assume this service has a list price of P L = $70. Calculate Q under each insurance plan. b. Calculate the amount of social loss under each insurance plan.

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