Assume that the Marginal Cost (supply) of influenza vaccinations is constant at
ID: 1244698 • Letter: A
Question
Assume that the Marginal Cost (supply) of influenza vaccinations is constant at $40. Assume that everyone in society has health insurance that pays 80% of all medical services, including flu shots. Assume first that the flu is not contagious. Q is the number of people who get flu shots and the market demand for flu shots is 100-Q. (I did 1,2,3 but included them because they are helpful in understanding 4 and 5) 1) What is the socially optimal number of flu shots? 2) How many flu shots will be provided in this market given the insurance? 3) Calculate the deadweight loss caused by the health insurance. 4) How should a health insurance provider respond to the inefficiency presented in this problem? Assume now that the flue is contagious and that getting a flue shot makes it impossible to catch the flue. Assume further that the probability p of catching the flu is given by x/100, where is the number of people who do not get a flu shot. Suppose that the cost of getting the flu is give by C, so that the expected cost to society is xC/100. 5) What is the value C such that the market outcome obtained in part 2 is socially optimal? (hint: compute expected total cost of getting the flu. Benefit of shots is the the costs avoided)Explanation / Answer
Without insurance the market equilibrium quantity would be where private marginal benefit equas private marginal cost , resulting in Q1 flu shotd being made and purchased. With insurance however people wil get flue shoyts as long as the marginal benefit from doing so exceeds the after insurance cost.
Given that insurance pays 80% of the cost of the flu shots , individuals with insurance pay only 8 dollars for a flue shot resulting the cost being made and purchased. However for every unit after Q1 flue benefit is less than the social cost of 40 dollars, implying that the production of those units creates a dead weight loss. Specifically the dead weight loss equal to the area triangle ABC