You are a health policy analyst working for the government of Technocratia. Its leaders are considering reforms to the countrys health insurance policies, and are seeking your input. To combat the adverse selection in its health insurance market, Technocratias government currently requires all of its residents to purchase health insurance. The penalties for not complying with the mandate are severe, so 100% of the population buys health insurance.

For simplicity, in each of the following questions you can assume the following:

the demand curve for health insurance is downward-sloping and crosses the AC curve at some point

the demand curve represents residents underlying willingness to pay for health insurance, without taking the penalties into account

there are no fixed costs

there is only one health insurance plan, which must be offered to all residents at the same competitive market price (i.e. P = AC at any given quantity).

Hint: When thinking about how to construct this problem graphically, refer to the graphs on the Week 11 slides for guidance, keeping in mind that Qmax = 100% in this case.

A) Although the entire population is currently insured, it is estimated that only 75% of the population actually values the health insurance at or above its current market price. Draw a graph of this insurance market, including the average cost (AC) and demand (D) curves, assuming adverse selection. Label the axes, curves, price and quantity of insurance currently purchased.

B) Technocratias leaders are considering whether its insurance requirement should be repealed, allowing individuals to choose whether or not to buy health insurance. Add labels to your graph from part a) indicating the new equilibrium price (P_b) and quantity (Q_b) of insurance that would be purchased if the repeal takes place

C)

Now suppose instead that there is in fact no adverse selection in Technocratias insurance market that is, the cost of providing coverage is unrelated to individuals willingness to pay for coverage. Assuming all other facts about this market remain the same (including the average cost of when the entire population is insured), amend the cost curves in your graph from part b) to reflect a lack of adverse selection in this market, but leave your labels Q_a, Q_b, P_a, and P_b in place for reference. Label the new equilibrium price (P_d) and quantity (Q_d), as well as the new AC/MC curve(s). [5 points]

Hint: if the cost of coverage is unrelated to individuals willingness to pay, then the marginal cost of providing insurance is the same at all quantities