The Lesson 6 assignment will cover the material on moral hazard in the health insurance market. You will need to read Malcolm Gladwell’s article linked to above and again here:
https://www.proquest.com/docview/233143878?accountid=14541&parentSessionId=V4%2B2rwK6emgFJhrg2gGUVG8L1tvgoxlTdwW81r1tqa0%3D&pq-origsite=primo
Please give answers and steps for each answer
HAP-425-001 & 002 — Summer 2023
Prof. Phillip C. Zane
Week 6 Assignment: Moral Hazard
Homework problems:
Question 1
In a neighborhood with 600 people, the market demand for a flu shot is
𝑄 = 400 − 2𝑝
where Q is the market demand, i.e., the number of flu shots demanded in the market as a whole, and p is
the out-of-pocket price of the flu shot.
a) Assume clinics will provide flu shots at a price of $40. How many people will get flu shots if it is
not covered by insurance?
b) How many people will get a flu shot if insurance covers the shot and the customer only pays a
$25 co-pay?
c) Briefly describe the moral hazard in terms of the price distortion and responsiveness to the price
distortion in this example. Extra credit: Calculate the social loss.
d) Explain why the moral hazard can be justified in this case even though consumption exceeds the
natural equilibrium quantity
Question 2
A person’s demand for a medical service is given by:
𝑞 = 80 − 𝑝
Where p is the out-of-pocket price of the medical service. This person is deciding between the following
four insurance options:
Option A: No insurance
Option B: Full insurance
Option C: A plan with 40% coinsurance
Option D: A plan with a $20 copay
a) Calculate the quantity demanded of the medical service under each option A through D if the list
price of the service is $50.
b) Which option causes the least amount of moral hazard and why? Which option causes the most
amount of moral hazard and why? Your explanations should be one sentence, non-technical
explanations (for example, imagine you were explaining this to an elderly relative who never
studied economics).
c) Using arguments from the article, “The Moral Hazard Myth” (linked above and on Blackboard),
explain why the option that causes the least amount of moral hazard or even the second least
amount of moral hazard may not be the most desirable option.
HAP-425-001 & 001 — Summer 2023 — © Prof. Phillip C. Zane & George Mason University
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