Fun with cost-sharing. An important distinction in health insurance is between the list price (P_L) and out-of-pocket price (P_P) of a medical good or service. The list price is the official price that the provider charges the insurance company, while the out-of-pocket price is the price that the insurance customer faces. Sometimes, the out-of-pocket price depends on the list price.

(a)Draw a set of axes with list price P_L on the y-axis and quantity Q on the x-axis (you will want to make your graph nice and big, because we will be adding several demand curves).

Suppose a consumer's demand for a particular medical procedure is as follows: Q = 100 - P_P. Draw her demand curve in P_L - Q space under the assumption of no insurance and label it D₁. You will have to think about the relationship between P_L and P_P to draw it correctly.

Now assume the same consumer is fully insured. Think about how this affects the relationship between P_L and P_P and draw a full-insurance demand curve in P_L - Q space. Label this curve D₂.

Now assume the consumer is part of a partial insurance plan with a coinsurance provision. Her insurance pays 50% of all medical expenses. Consider again the relationship between P_L and P_P and plot a coinsurance plan demand curve in P_L - Q space. Label this curve D₃.

Finally, assume the consumer is part of a partial insurance plan with a copayment provision. Her insurance pays all expenses above and beyond her copayment of $25 for each unit of Q. Consider again the relationship between P_L and P_P and plot a copayment-plan demand curve in P_L - Q space. Label this curve D₄.