magine that at your first full time job after graduation, you need to decide between getting an HMO or a

FFS health plan. Suppose that the average client of FFS buy $$5000$ in services $($s$$F $=5,000).$ In the HMO

market, the average HMO client buy $$3500$ services $($s$$H $=$$$3500),$ and HMO market operated with an

efficiency factor of $\mathrm{.}8.$ The coinsurance rate for both plans is r$=25\%$

The FFS plan charges you a $25$ percent coinsurance rate. The FFS plan average coinsurance rate is also

$25$ percent. In addition, we estimate that the value of being able to freely choose one$$s doctor

under the FFS plan is worth $1\mathrm{.}1$ times a patient$$s medical costs to treat the severity of the

illness, s$.$ Assume that both the HMO and FFS providers earn zero profits in the long run.

Hint: for the questions below remember that the extra cost of FFS plan is defined as:

E$=$ FFS cost $$ HMO cost $=($Deductibles $+$ FFS copay$)$ HMO price $=$

$=[(1)\backslash$alpha $]+$

A$)$ Set up this problem graphically, labelling the E and V curves

B$)$ At which values of s would you be indifferent between an HMO and a FFS plan? Explain the

intuition of this value

C$)$ If you expect to spend $$2000$ on health care, will you choose and HMO or a FFS plan? WHY?

Explain the intuition

D$)$ If you expect to spend $$1000$ on health care, will you choose and HMO or a FFS plan? WHY?

Explain the intuition