Policy Application: Moral Hazard versus Adverse Selection in Health Care Reform. In this exercise, we explore moral hazard in the context of health insurance. Suppose throughout that individuals do not engage in riskier life-styles as a result of obtaining health insurance. (a) How does this assumption eliminate one form of moral hazard that we might worry about? (b) Suppose that a unit of health care x is such that it can be provided at constant marginal cost that is the same for all patients. On a graph with health care units on the horizontal, and price on the vertical, illustrate a patient's demand curve for x as well as the MC curve for providing x. (c) Suppose dema.nd tor health care services is equal to marginal willingness to pay. If the patient pays out-of-pocket for health care, how much would she consume assuming that health care services are competitively priced (with health care providers facing negligible recurring fixed costs)? (d) Suppose next that the patient has insurance coverage that pays for all health related expenses. How much x does she consume now? (e) Moral hazard refers to the change in behavior that arises once a person enters a contract. Have you just uncovered a source of moral hazard in the health insurance market? Explain how this results in inefficiency. (f) Suppose we have two individuals, one for whom the moral hazard problem is small, and one for an individual where the moral hazard is large. How will their demand curves for health care differ