The chart below depicts an individual's utilization of her regular physician's services, measured in number of visits. The downward-sloping purple line represents her demand for (i.e. marginal benefit of) office visits, the horizontal black line, at $140, is the market price of an office visit, the blue line, at $80, is the marginal cost the physician incurs for each visit, and the red line, at $40, is the per-visit copayment paid by the individual (she is insured).

In addition, the green trapezoid, MB, represents the minimum benefit the physician must provide this individual (i.e. patient) in order to avoid losing her to an alternative provider.

NOTE: 1) The demand curve and market price intersect at 1 visit.

2) The demand curve and marginal cost intersect at 4 visits.

3) MB fills the area between the demand curve and $40 up to 4 visits.

a. Assume the individual is perfectly informed (i.e. as informed as the physician, so there is no information asymmetry). How many visits will the individual make? (2 pts.)

b. Now, assume the physician can induce demand because of information asymmetry. How many visits will the individual make? (2 pts.)

FOR THE NEXT TWO QUESTIONS (c. and d.): Suppose there is an increase in competition in this market due to an increase in the number of physicians.

As a result, market price falls to $130.

Suppose the increase in competition does not change the individual's information about alternative providers,

so that MB does not change (i.e. it continues to fill the area between the demand curve and $40 up to 4 visits).

c. Assuming the physician can induce demand, how many visits will the individual make? (2 pts.)

Alternatively, suppose the increase in competition increases the individual's information about alternative providers,

so that MB increases in size, filling the area between the demand curve and $40 up to 5 visits.