We calculate the total welfare of having health insurance in one case. Suppose the price of hospitalization (i.e. impatient care) is p=500, and suppose the demand function for hospitalization with no insurance is written as q= -0.01p+6, where q is quantity and p is price of hospitalization. One illness might occur with probability of f (=0.4). Suppose one obtains health insurance with a coinsurance rate of 0.2 (no deductible, no stop-loss).

1) Without health insurance, what is the expected number of hospitalizations?

2) With health insurance, what is the expected number of hospitalizations?

3) What is the welfare loss form moral hazard?

4) What is the expected benefit to be paid by insurance company?

5) Suppose the loading fee is 20%. What is the insurance premium?

6) Suppose the risk premium for this risk is $300. How much is the consumer willing to pay for this insurance policy?

7) What is the gain for the consumer?

8) What is total net welfare (where the welfare gain is the risk reduction, and thewelfare cost is moral hazard)? Is there a total net welfare gain or loss?