ECON326: Health Economics 6
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Seminar, week 6
ECON326: Health Economics
Analytical problems:
1. Textbook, Chapter 9, Problem 12
Consider Figure 9.20:
a. Explain why the frail-type indifference curve pictured, Ur, is not a valid indifference curve.
b. Draw your own version of this figure and label two contracts, A and B. Draw the two contracts such that:
• Contract A is strictly better than B, with more income in both states of the world, and
• the customer with the pictured indifference curve nonetheless prefers contract B to contract A.
c. Draw a valid version of a frail-type indifference curve that intersects 1 , 2 , and the full-insurance line.
d. Is ( 1 , 2) a valid separating equilibrium? Defend your answer.
2. Textbook, Chapter 11, Problem 12
Faustian health economics. Consider Figure 11.10, which shows the locus of feasible contracts for the population of the nation of Pcoria.
a. In which corner of this diagram (northeast, southeast, northwest, or southwest) is utility highest for consumers? What prevents insurance companies from offering contracts in this corner?
b. On your own version of Figure 11.10, plot new points to represent where the market would be under i) a nationally-mandated full insurance policy and ii) an insurance ban.
c. Would a nationally-mandated full insurance policy be optimal for Pcoria? What about an insurance ban?
d. Suppose the devil approaches the newly-elected President of Pcoria with an unusual bargain. He offers to magically eliminate moral hazard, but in return Pcoria must forbid contracts that are more than half full. On a new version of this figure, draw a new locus of the contracts that would be feasible if the President takes the devil’s bargain.
e. Should the President take the devil’s bargain? Why or why not?
f. The indifference curves in Figure 11.10 represent one possible set of preferences for Pcorian society. On a new figure, draw an alternative set of indifference curves such that the bargain is a good deal relative to the status quo.
g. Which type of society is more likely to accept the devil’s bargain: one that is relatively risk-neutral or one that is relatively risk-averse? Explain why your answer makes intuitive sense.
3. Textbook, Chapter 11, Problem 13
Exotic indifference curves. Consider Figure 11.10, which shows the locus of feasible contracts for the population of the nation of Pcoria. The indifference curves are concave, which represents the fact that consumers want full insurance but also want low premiums.
a. Suppose now that the indifference curves are horizontal. What does this imply about Pcorian preferences? What is the optimal level of insurance under this scenario?
b. Suppose now that the indifference curves are vertical. What does this imply about Pcorian preferences? What is the optimal level of insurance under this scenario?
2022-03-25