Answer to Question #98398 in Economics for Rebekah Lee

Question

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 pocket price of a stay to $100, and at that price, 1200 people are hospitalized.

a. If the Supply curve were upward sloping, would moral hazard be larger or smaller than you computed in b? Explain why.

b. If the Supply curve were upward sloping, would moral hazard be larger or smaller than you computed in b? Explain why.

Answer 1

b. If the Supply curve were upward sloping, then moral hazard would be larger or than if it were flat at P = 10,000.