Moral Hazard

Question 1

In a neighborhood with 600 people, the market demand for a flu shot is

Q= 300 - 2P

where Q is the number of flu shots demanded and P is the out-of-pocket price of the flu shot.

a)Assume clinics will provide flu shots at a price of $50.How many people will get flu shots if it is not covered by insurance?

b)How many people will get a flu shot if insurance covers the shot and the customer only pays a $30 co-pay?

c)Briefly describe the moral hazard in terms of the price distortion and responsiveness to the price distortion in this example, and calculate the social loss.

d)Explain why the moral hazard can be justified in this case even though consumption exceeds the natural equilibrium quantity

Question 2

A person's demand for a medical service is given by:

Q = 100 - P

Where P is the out-of-pocket price of the medical service. This person is deciding between the following four insurance options:

Option A: No insurance

Option B: Full insurance

Option C: A plan with 50% coinsurance

Option D: A plan with a $10 copay

a)Calculate the quantity demanded of the medical service under each option A through D if the list price of the service is $50.

b)Which option causes the least amount of moral hazard and why? Which option causes the most amount of moral hazard and why? Your explanations should be one sentence, non-technical explanations (for example, imagine you were explaining this to your grandmother).

c)Using arguments from the article, "The Moral Hazard Myth" (http://www.newyorker.com/archive/2005/08/29/050829fa_fact), explain why the option that causes the least amount of moral hazard or even the second least amount of moral hazard may not be the most desirable option.