1.The following questions concern the use of deductibles.

a. Show the effect graphically of a deductible on the demand for medical care.

Assume no insurance coverage initially. Then assume there is an insurance policy with a $500 deductible. The price of medical care is $50 per unit. After the deductible is satisfied, the health insurance plan pays for 75 percent of expenses.

b. Now assume the policy does not have a deductible but pays 100 percent of expenses after a stop loss of $2,000. Show this graphically. (Stop loss meaning an out-of-pocket spending maximum, after which everything is free.)

Hint: This should be all one picture. The demand curve should have three distinct sections: 0 to 500, 500 to 2,000, and 2,000+.