Question 1: Suppose, if ill, that Fred's demand for health services is summarized by the demand curve Q = 50 - 2P, where P is the price of services in dollars and Q is the amount of services purchased in unspecified units. Fred has a 30% chance of falling ill each year. The market price of services is $20 per unit.
a. If uninsured, how many services does Fred purchase if ill and what is the total amount of money he spends?
b. If fully insured (no coinsurance), how many services does Fred purchase if ill and what is the total amount of money spent by the insurance company on Fred's illness?
c. If there are no loading costs, what is the price of insurance, sold to consumers like Fred, that yields zero expected profit?
Suppose, instead, that Fred's demand is completely inelastic.
d. What is the difference in amount of services between having insurance and not having insurance?
e. Should insurance contain more cost-sharing when Fred has more inelastic demand or more elastic demand? Briefly explain why.