Consider Troy and Paula, Each of Whom Recently Purchased Health

question 39

Essay

Consider Troy and Paula, each of whom recently purchased health insurance with a 20% coinsurance rate (i.e., an insured person pays 20% of the price of a physician visit). Troy's demand curve for physician visits is Q_R = 6, and Paula's demand curve for physician visits is Q_P = 20 - 0.10P, where Q represents the number of physician visits and P is the price per visit. Suppose that the market price, P, for physician visits is $100.
a. Without insurance coverage, how many physician visits do Troy and Paula make?
b. Assuming a 20% coinsurance rate and market price of $100, what out-of-pocket price does Paula pay per visit with insurance coverage?
c. With insurance coverage, how many times does Troy visit the physician? Paula?
d. Explain whether Troy and Paula's purchase of health insurance created moral hazard.

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Definitions:

Required Rate

The minimum return that investors expect or the company specifies for an investment, project, or loan.

Investment Equipment

Assets purchased for long-term use in the production of goods or services, typically including machinery and other manufacturing tools.

Project Profitability Index

A financial metric used to evaluate the desirability of an investment or project, calculated by dividing the present value of future cash flows by the initial investment cost.

Internal Rate Of Return

The discount rate at which the net present value of an investment project is zero; the rate of return of a project over its useful life.