Question

(20 points) Question 3. (Deadweight Loss from Over-consumption of Health Care due to Health Insurance) An individual's demand for physician office visits per year is Q = 10- 7P, where P is the price of an office visit. The marginal cost of producing an office visit is $120. 1. If individuals pay full price for obtaining medical services, how many office visits will they make per year? 2. If individuals must pay only a $20 copayment for each office visit, how many office visits will they make per year? 3. What is the deadweight loss to society associated with not charging individuals for the full cost of their health care?

Answer 1

1. it can be determined by setting the marginal benefit of a physician office visit equal to the marginal cost. To calculate the MC, invert the demand function so that it is expressed in terms of price or dollar amount a patient is willing to pay.

Q= 10- 1/20 P gives P=200-20Q

Set demand equal to supply, which gives 120=200-20Q and  Q=4, the patient will visit doctor 4 times a year.

2. Q= 10- 1/20P

Q= 10- 1/20 (20)

Q= 9

3. Deadweight of the society will be the area of triangle lost,so

quantity difference=9-4=5

Dollar difference= 120- 20= 100½ b x h= ½ (100 x 5)= $250

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