3. The figure below demonstrates the moral hazard with insurance coverage. When consumer pays 50% coinsurance at each visit, quantity demanded rises from q₁ to q2 and the price for each visit falls from P₁ to P2 per visit. The shaded area is the deadweight loss due to moral hazard. Price (P) MC P₁ P Number of Physician Visits (Q) Q₂ a A. If coinsurance rate drops from 50% to 0%, how quantity and price per visit will change? Briefly explain. B. Suggest two methods to avoid moral hazard problems in designing insurance benefits. Briefly explain. C. If insurance for very high-cost items (e.g. organ transplant) can be viewed as an income transfer from the risk pool to the affected patients, how will this affect the welfare loss from moral hazard? Brief explain.

3. The figure below demonstrates the moral hazard with insurance coverage. When consumer pays 50% coinsurance at each visit, quantity demanded rises from q₁ to q2 and the price for each visit falls from P₁ to P2 per visit. The shaded area is the deadweight loss due to moral hazard. Price (P) MC P₁ P Number of Physician Visits (Q) Q₂ a A. If coinsurance rate drops from 50% to 0%, how quantity and price per visit will change? Briefly explain. B. Suggest two methods to avoid moral hazard problems in designing insurance benefits. Briefly explain. C. If insurance for very high-cost items (e.g. organ transplant) can be viewed as an income transfer from the risk pool to the affected patients, how will this affect the welfare loss from moral hazard? Brief explain.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

urgntly

3. The figure below demonstrates the moral hazard with insurance coverage.
When consumer pays 50% coinsurance at each visit, quantity demanded rises
from q₁ to q2 and the price for each visit falls from P₁ to P2 per visit. The
shaded area is the deadweight loss due to moral hazard.
Price
(P)
P₁
MC
P₂
Number of Physician
Visits (Q)
Q₂
a
A. If coinsurance rate drops from 50% to 0%, how quantity and price per visit will
change? Briefly explain.
B. Suggest two methods to avoid moral hazard problems in designing insurance
benefits. Briefly explain.
C. If insurance for very high-cost items (e.g. organ transplant) can be viewed as
an income transfer from the risk pool to the affected patients, how will this
affect the welfare loss from moral hazard? Brief explain.

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