Question 1 (30%): Policy Suggestions. The government plans to adjust the coinsurance rate in order to balance the Medicare budget and wants to know exactly how much to increase the rate. Senior economists at the Ministry of Finance argue that the policy will have two effects: (i) lower cost per patient because the government covers a lower share of health care spending, and (ii) reduced overall demand because of higher out-ofpocket price. 1. (10%) As a junior economist you are asked to estimate the elasticity of demand but you get conicting recommendations. One senior economist suggests the slope of the demand curve, another the standard demand elasticity and a third the arc elasticity of demand. Which one do you think is more appropriate? Try to convince the other two senior economists. 2. (10%) The same group of senior economists argue that we can save Medicare by improv ing public health, in particular reduce smoking and obesity. Try to convince them that this can backfire in terms of fiscal balance