Question

A consumer's demand for medical service is as follows: Q=120−2Pₚ where Pₚ is the out-of-pocket price that the consumer faces and Q is the quantity demanded at a particular out-ofpocket price. Say, the medical service has a list price of P1 =$25. Calculate the following (up to 2 decimal places) The social loss under a full insurance plan: $....... The social loss under a 20% coinsurance insurance plan: $........ The social loss under a copayment plan with a $10 copay: $.........

Answer 1

To calculate the social loss under different insurance plans, we analyze the consumer's demand function. Under a full insurance plan, there is no social loss. Under a 20% coinsurance plan, the social loss is calculated by comparing the quantity demanded to full insurance. Under a copayment plan with a $10 copay, the social loss is calculated in the same way.

Step-by-step explanation:

To calculate the social loss under different insurance plans, we need to analyze the consumer's demand function and the different insurance arrangements. The consumer's demand for medical service is given by the equation Q = 120 - 2Pₚ, where Q is the quantity demanded and Pₚ is the out-of-pocket price. For a full insurance plan, where the consumer faces no out-of-pocket cost, the price that the consumer faces is effectively zero (Pₚ = 0). Substituting this into the demand function, we get Q = 120. Therefore, under a full insurance plan, the quantity demanded is 120 and there is no social loss.

Under a 20% coinsurance insurance plan, the consumer pays 20% of the out-of-pocket price. In this case, Pₚ = 0.2P₁, where P₁ is the list price. Substituting this into the demand function, we get Q = 120 - 2(0.2P₁) = 120 - 0.4P₁. To calculate the social loss, we need to find the difference between the quantity demanded under the coinsurance plan and under full insurance.