Suppose a company has invented and patented a new effective drug to treat hay fever. For simplicity, assume there is no fixed cost and the marginal cost of producing the drug is: MC=$ 4. Without being covered in any insurance plan, the market demand is as follows: Qd =100040 P (a) What are the equilibrium price and quantity, assuming the drug is not covered by any health insurance? (10 points) (b) Suppose the drug is covered by a public health insurance plan and everyone is eligible. Under this plan, the co-insurance rate is 20% and the payment from the insurer is capped at $20. That is, the insurer will pay 0.8P if P $24 and the insurer will pay $20 if P $24. What is the market demand under this insurance policy? What price should the company charge and what is the equilibrium quantity? (10 points) (c) Suppose the public health insurer changes the policy. Now, the co-payment from the customers is capped at $5 and the rest will be paid by the insurer. For example, if P=$10 the customer will pay $5 and the insurer will pay $5. If P=$11 the customer will pay $5 and insurer will pay $6. Additionally, the insurer demands that the maximum price (P) the company can charge is $12, or the drug will not be covered by the insurance. Under this situation, what is the market demand? What price the firm should charge and how much should the firm produce? (10 points) 2