Problem
Consider Tom, who is eligible for government health insurance and consumes two goods, "insurance" and "all other goods." Health insurance and other goods trade off dollar for dollar (there is no tax advantage to health insurance). Assume that a person receiving government health benefits is not allowed to purchase supplemental private insurance.
1. Suppose that public insurance provides SM worth of benefits. Draw the budget constraint showing the trade off between health insurance and other goods. Suppose that Tom chooses private coverage despite being eligible for government health insurance. Draw a possible indifference curve that could correspond to Tom's choice.
2. Suppose that government increases the generosity of public insurance to SM'. Show the new budget constraint. Suppose that Torn decides to switch to pubic insurance. Draw a possible indifference curve that could correspond to Tom's choice.