Consider how health insurance affects the quantity of health care services perfo

Question

Consider how health insurance affects the quantity of health care services performed. Suppose that the typical medical procedure has a cost of $160, yet a person with health insurance pays only $40 out of pocket. Her insurance company pays the remaining $120. (The insurance company recoups the $120 through premiums, but the premium a person pays does not depend on how many procedures that person chooses to undergo.) Consider the following demand curve in the market for medical care. Use the black point (plus symbol) to indicate the quantity of procedures demanded if each procedure has a price of $160. Then use the grey point (star symbol) to indicate the quantity of procedures demanded if each procedure has a price of $40. 200 180 oD at P-$160 160 1-10 Q. at P-540 120 100 80 60 40 20 t Demand 0 0 20 30 40 50 60 70 0 9 100 Quantity of Medical Procedures

Explanation / Answer

1. The Black point will be at Price=160 and Qd=10

The Grey point will be at Price=40 and Qd=40

2. If the cost of each procedure to society is truly $160, the quantity that maximizes total surplus is 10 procedures.

3. viewed as excessive because consumer get procedures whose value is less than the cost of producing them

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