Assume that the demand function is D₁ (demand with the smallest slope on the left ). As illustrated in the figure, if the price of that service is $50, there are 50 units of that service demanded by patients, and if that service is free, quantity demanded by patient is 100.

1. Assuming the price of that service is $50, calculate the exact size of moral hazard if health insurance covers fully that service, i.e. no cost-sharing. Show your calculation and explain what is going on.
2. If the health insurance plan introduces a co-insurance rate of 50% for that service, how does moral hazard compare to the one with full coverage (Q1)? Explain. No calculation needed here.

Now, assume that the demand function is D₂ (vertical demand on the right).

Calculate the size of moral hazard if health insurance covers fully that service. Show your calculation and explain what is going on.

Now, compare D₁ and D₂: