2) The figure above represents the market for medical services with and without

Question

2) The figure above represents the market for medical services with and without insurance, and the effect of a third-party payer system on the demand for medical services.

a) If consumers paid the full price of medical services, what is the price they would pay ?

b) If consumers paid the full price of medical services, what would the equilibrium quantity be?

c) With insurance and a third-party payer system, what price do doctors receive for medical services?

  d) With insurance and a third-party payer system, what price do consumers pay for medical services?

e) With insurance and a third-party payer system, what is the equilibrium quantity of medical services?

f) What is the efficient price of medical services?

g) What is the efficient quantity of medical services?

h) In this scenario, do insurance and the third-party payer system improve economic efficiency?

Explanation / Answer

a) If consumers paid the full price of medical services, they would pay $40 (from the graph using intersection of Supply and D1)

b) If consumers paid the full price of medical services, the equilibrium quantity would be 500 (from the graph using intersection of Supply and D1)

c) With insurance and a third-party payer system, doctors would receive for medical services a price of $55 (from the graph using intersection of Supply and D2)

d) With insurance and a third-party payer system, consumers pay $25 for medical services (from the graph using intersection of Supply and D1 at the equilibrium Quantity of intersection of supply and D2)

e) With insurance and a third-party payer system, the equilibrium quantity of medical services is 700 (from the graph using intersection of Supply and D2)

f) the efficient price of medical services with insurance is $55 (from the graph using intersection of Supply and D2)

g) the efficient quantity of medical services with insurance is 700 (from the graph using intersection of Supply and D2)

h) Yes, since the patient pays $25 and the insurer pays the doctor $55 per visit, surely the insurance and the third-party payer system improve economic efficiency. However, this also depends on the initial premium charged by the insurer.

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