Chapter 24, Problem 4C

Sub part (a):

To determine

The demand for medical appointments in the market with and without medical insurance.

Explanation of Solution

The market is a structure where there are buyers and sellers who sell and the exchange of goods and services take place between them. The price is determined by the interaction of the demand and supply in the market.  Sometimes the price acts as the market signals as they will passively pass the information about the scarcity of the commodity and related needs to conserve the commodity. The market price also signals about the condition as well as the nature of the commodity traded.

When the consumers have to pay the cost of every appointment that he makes with the physician out of his own pocket, the demand for the appointments will be lower. However, when the 50 percent costs of the appointments are taken care under the medical insurance policy, they show that the Demand for the medical appointments will be twice as higher than the previous level without insurance. This is because at every level of quantity with the insurance in the hand, the real price would have to be twice as high as for the out of pocket cost for the patient to be equal to what it would be without the insurance. This can be explained with an example, when the price of the appointment is $150 without insurance, the patient will go for 3 appointments. However, when there is an insurance which covers 50 percent of the appointment cost, the patient would go for three appointments even when the cost of each of them is $300.

Economics Concept Introduction

Concept introduction:

Market signals: They are the unintentional or passive passage of information between the participants of the market.

Asymmetric information: The problem of asymmetric information emerges when there is a difference in the degree of information in the market. The asymmetric information leads to wrong choices by the consumer. The problems caused due to the asymmetric information are the adverse selection and moral hazard.

Moral Hazard: The moral hazard problem is a problem that arises due to the insurance sector. When one is insured against the loss of wealth or health, one will lack the care for one’s health or wealth and the chances for falling ill or wealth getting theft is higher because one knows that the insurance companies will bear one’s loss and repay them for one’s losses.

Adverse selection: The adverse selection is a prominent problem in the market for second hand cars. The asymmetric information leads the buyers to select the bad lemons (bad cars) from the market instead of good cherries (good cars).

Sub part (b):

To determine

The demand for medical appointments in the market with and without medical insurance.

Explanation of Solution

When there is no insurance in the hand and the patient have to pay out of his own pocket for the appointments that he makes with the physician, the patient will make 4 appointments. When there is an insurance facility available, the individual would make five appointments with the physician which can be easily identified.

Economics Concept Introduction

Concept introduction:

Market signals: They are the unintentional or passive passage of information between the participants of the market.

Asymmetric information: The problem of asymmetric information emerges when there is a difference in the degree of information in the market. The asymmetric information leads to wrong choices by the consumer. The problems caused due to the asymmetric information are the adverse selection and moral hazard.

Moral Hazard: The moral hazard problem is a problem that arises due to the insurance sector. When one is insured against the loss of wealth or health, one will lack the care for one’s health or wealth and the chances for falling ill or wealth getting theft is higher because one knows that the insurance companies will bear one’s loss and repay them for one’s losses.

Adverse selection: The adverse selection is a prominent problem in the market for second hand cars. The asymmetric information leads the buyers to select the bad lemons (bad cars) from the market instead of good cherries (good cars).

Sub part (c):

To determine

The demand for medical appointments in the market with and without medical insurance.

Explanation of Solution

It is given that the cost per appointment with the physician is $100. When there is no insurance for the person, the person will take four appointments and this means that the person have to pay the $100 four times out of his own pocket which makes the total cost of the patient equal to $400. When there is insurance available, the patient has to pay only 50 percent of the appointment cost which is equal to $50 per appointment and he makes 5 appointments. Thus, the cost for the patient is $250 and the $250 will be paid by the insurance. Thus, the total spending without insurance is equal to $400 and with insurance is $500.

Economics Concept Introduction

Concept introduction:

Market signals: They are the unintentional or passive passage of information between the participants of the market.

Asymmetric information: The problem of asymmetric information emerges when there is a difference in the degree of information in the market. The asymmetric information leads to wrong choices by the consumer. The problems caused due to the asymmetric information are the adverse selection and moral hazard.

Moral Hazard: The moral hazard problem is a problem that arises due to the insurance sector. When one is insured against the loss of wealth or health, one will lack the care for one’s health or wealth and the chances for falling ill or wealth getting theft is higher because one knows that the insurance companies will bear one’s loss and repay them for one’s losses.

Adverse selection: The adverse selection is a prominent problem in the market for second hand cars. The asymmetric information leads the buyers to select the bad lemons (bad cars) from the market instead of good cherries (good cars).

Sub part (d):

To determine

The demand for medical appointments in the market with and without medical insurance.

Explanation of Solution

The total annual value of the appointments to the patient is the area under the demand curve D1 up to the quantity demanded by the patient. When the patient demands four appointments, the area below the demand curve D1 which has an area of $800 and when the quantity demanded is five appointments by the patient, the annual value increases by $75 to become an area of $875.

Economics Concept Introduction

Concept introduction:

Market signals: They are the unintentional or passive passage of information between the participants of the market.

Asymmetric information: The problem of asymmetric information emerges when there is a difference in the degree of information in the market. The asymmetric information leads to wrong choices by the consumer. The problems caused due to the asymmetric information are the adverse selection and moral hazard.

Moral Hazard: The moral hazard problem is a problem that arises due to the insurance sector. When one is insured against the loss of wealth or health, one will lack the care for one’s health or wealth and the chances for falling ill or wealth getting theft is higher because one knows that the insurance companies will bear one’s loss and repay them for one’s losses.

Adverse selection: The adverse selection is a prominent problem in the market for second hand cars. The asymmetric information leads the buyers to select the bad lemons (bad cars) from the market instead of good cherries (good cars).

Sub part (e):

To determine

The demand for medical appointments in the market with and without medical insurance.

Explanation of Solution

It is given that the cost per appointment with the physician is $100. When there is no insurance for the person, the person will take four appointments and this means that the person have to pay the $100 four times out of his own pocket which makes the total cost of the patient equal to $400. When there is an insurance available, the patient have to pay only 50 percent of the appointment cost which is equal to $50 per appointment and he makes 5 appointments. Thus, the cost for the patient is $250 and the $250 will be paid by the insurance. Thus, the total spending without insurance is equal to $400 and with insurance is $500. Thus, the total surplus without insurance can be calculated by subtracting the total cost from total value as follows:

$\begin{array}{c}{\text{Total surplus}}_{\text{Without insurance}}={\text{Total value}}_{\text{Without insurance}}-{\text{Total cost}}_{\text{Without insurance}}\\ =800-400\\ =400\end{array}$

Thus, the total surplus without insurance is $400. The total surplus with insurance can be calculated similarly as follows:

$\begin{array}{c}{\text{Total surplus}}_{\text{With insurance}}={\text{Total value}}_{\text{With insurance}}-{\text{Total cost}}_{\text{With insurance}}\\ =875-500\\ =375\end{array}$

Thus, with the insurance the total surplus decreases to $375. So, it shows that the total surplus is higher when there is no insurance because with insurance it inspires the fifth visit which is valued lower than $100.

Economics Concept Introduction

Concept introduction:

Market signals: They are the unintentional or passive passage of information between the participants of the market.

Asymmetric information: The problem of asymmetric information emerges when there is a difference in the degree of information in the market. The asymmetric information leads to wrong choices by the consumer. The problems caused due to the asymmetric information are the adverse selection and moral hazard.

Moral Hazard: The moral hazard problem is a problem that arises due to the insurance sector. When one is insured against the loss of wealth or health, one will lack the care for one’s health or wealth and the chances for falling ill or wealth getting theft is higher because one knows that the insurance companies will bear one’s loss and repay them for one’s losses.

Adverse selection: The adverse selection is a prominent problem in the market for second hand cars. The asymmetric information leads the buyers to select the bad lemons (bad cars) from the market instead of good cherries (good cars).

Sub part (f):

To determine

The demand for medical appointments in the market with and without medical insurance.

Explanation of Solution

When there is an insurance, the people are less careful and they ignore the means of appointment because they have to pay only 50 percent of the appointment cost out of their pocket. This problem is known as the moral hazard.

Economics Concept Introduction

Concept introduction:

Market signals: They are the unintentional or passive passage of information between the participants of the market.

Asymmetric information: The problem of asymmetric information emerges when there is a difference in the degree of information in the market. The asymmetric information leads to wrong choices by the consumer. The problems caused due to the asymmetric information are the adverse selection and moral hazard.

Moral Hazard: The moral hazard problem is a problem that arises due to the insurance sector. When one is insured against the loss of wealth or health, one will lack the care for one’s health or wealth and the chances for falling ill or wealth getting theft is higher because one knows that the insurance companies will bear one’s loss and repay them for one’s losses.

Adverse selection: The adverse selection is a prominent problem in the market for second hand cars. The asymmetric information leads the buyers to select the bad lemons (bad cars) from the market instead of good cherries (good cars).