Moral Hazard

Consider an uninsured person with an inverse linear demand curve for a prescription drug given by: P = 1, 000 10

Q 1. Suppose the market for drugs is perfectly competitive and that each drug is offered at a Price P=500 equal to it's marginal costs of production. How many units does the consumer purchase at this price and is there a deadweight loss (DWL)? And if so how large is it (the DWL)? (10 points)

2. Now suppose that the person gains health insurance coverage. The insurance plan has a coinsurance rate of 40% (the patient pays only 40% of all charges out-of-pocket). How many units does the consumer purchase now and is there a deadweight loss? And if so how large is it? (10 points)

3. Now suppose that the insurance plan sets the coinsurance rate to zero and instead asks for a copay of 150 dollars per unit. How many units does the consumer purchase at this price and is there a deadweight loss? And if so how large is it? (10 points)

4. Finally, suppose that the insurer keeps the copay amount at 150 dollars per unit but asks patients to pay the full price (500) out-of-pocket until the consumer hits the deductible amount of 600 dollars. How many units does the consumer purchase at this price and is there a deadweight loss? And if so how large is it? What would be the smallest deductible amount that sets the deadweight loss to zero? (20 points)