When firms decide to offer health insurance to their workers [for simplicity we assume they pay the full cost of the policy and do not ask for an employee contribution], they need to reconsider the wages they are willing to pay their workers. Assume the worker values the health insurance at full cost. Please use a labor supply and demand graph (as we covered in class) to analyze the effect of introducing insurance on the labor market. Show the supply and demand equations before and after health insurance is offered. Make sure to always label graphs well and indicate the equilibrium level of wages that result before and after health insurance is offered. How does this help us see who really pays for employer provided health insurance?
Suppose the original demand for labor equation is given by W=12-0.5L and the original labor supply equation is given by W=L. Suppose that health insurance costs $2 per worker. Please write down the new equations for the demand and supply graphs once insurance is introduced, and explain how you obtain them.