Suppose the equilibrium price for an average hospital stay in the absence of insurance is $10,000. At that price, 1000 people are hospitalized each year. Now suppose an insurer offers a policy to lower the out of the pocket price of a stay to $100, and at that price, 1200 people are hospitalized.
a. Is the demand for hospital care elastic or inelastic?
b. How much moral hazard results from this type of insurance IF the supply curve is flat, that is, if horizontal at P = $10,000 per stay, regardless of how many?