Suppose that the market demand for medical care is summarized by the demand function: Qd = 500 – 4p and the market supply is summarized by the inverse supply function: P = 25 (i.e., horizontal supply curve at price of 25).
a. Calculate the equilibrium quantity and price, assuming no health insurance is available.
b. Suppose that health insurance is made available that provides for a 20 percent coinsurance rate. Calculate the new equilibrium price and quantity. (Hint: How does the demand curve shift?)
c. Calculate the deadweight loss due to this insurance.
d. Graph your results.