The graph below shows the supply and demand for health care. The demand curve re
ID: 1119984 • Letter: T
Question
The graph below shows the supply and demand for health care. The demand curve reflects the marginal social benefit of health care, while the supply curve reflects the marginal social cost. What is the efficient amount of health care expenditures? Suppose that health insurance reduces the price of health care from an average of $100 per unit to S50 per unit. How would such third party payments affect the quantity demanded? Assuming that the price must increase to S150 to accommodate the new quantity demanded, calculate the increase in expenditures for health care. What is the loss in efficiency that results from third-party payments? How could the loss in net benefits from the overallocation of resources to health care be reduced? a. b. c. d. e. Price (S per Unit) Supply 150 100 50 Demand 7 Health Care Services (Billions of Units)Explanation / Answer
(a) Efficient amount of health care expenditures is where MSC=MB , is $(100)(4)= $400 billion.
(b) Suppose that health insurance reduces the price of health care from an average of $100 per unit to $50 per unit.Then, the third party payments increase the quantity demanded by (7-3) = 3 billion of units.Because Now, the quantity demanded is 7 billion of units.
(c) Assuming that the price must increase to $150 to accomodate the new quantity demanded,then the increase in expenditures for health care is (150-50)(7) = 700 billion . Then , total expenditure is 700+350 = 1050 billion of units.
(d) There is Loss in efficiency that results from third party payments . Because consumer surplus decreases.
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