1. Problems - 2012 Due Thursday, September 27

2. A Simple Model Goods Where: M = Medical care w/ price p m z = all else w/ price 1 r = insurer’s share of payment y = income

3. A Simple Model (2) Time Where: T = Total time t = time cost of medical care T w = Time spent working Income Where: w = wage rate V = dividend income

4. A Simple Model (3) So: Full price of M is [p m (1- r) + wt].

5. A Simple Model (4) Maximizing Utility

6. Assume U = M 0.32 z 0.64 V = $20/day T = 20 hours/day t = 1 hours/M w = $25/hour r = 0.9 P m = $150Price of z = 1 Questions: 1.Calculate equilibrium values M*, z*, T w *. 2.Starting with the initial values, calculate the impact of a 20% dividend decrease on M*, z*, T w *. 3.Starting with the initial values, calculate the impact of a 20% wage decrease on M*, z*, T w *. Is this the same impact as question 2 – why or why not? 4.Starting with the initial values, calculate the impact of a 20% increase in P m on M*, z*, T w *. Explain each impact. What is the elasticity of substitution between M and z? What is the money price elasticity? What is the full price elasticity? 5.Starting with the initial values, suppose you were offered the opportunity to buy an alternative health insurance policy for $16 per day + a 8% coinsurance rate rather than the current 10% rate. What is your decision criterion? Would you take the alternative? Why or why not?

7. CES U = 14[0.75M 0.4 +0.25z 0.4 ] 2.25 V = $20/day T = 20 hours/day t = 1 hours/M w = $25/hour r = 0.9 P m = $150Price of z = 1 Questions: 1.Calculate equilibrium values M*, z*, T w *. 2.Starting with the initial values, calculate the impact of a 20% dividend decrease on M*, z*, T w *. 3.Starting with the initial values, calculate the impact of a 20% wage decrease on M*, z*, T w *. Is this the same impact as question 2 – why or why not? 4.Starting with the initial values, calculate the impact of a 20% increase in P m on M*, z*, T w *. Explain each impact. What is the elasticity of substitution between M and z? What is the money price elasticity? What is the full price elasticity 5.Starting with the initial values, suppose you were offered the opportunity to buy an alternative health insurance policy for $16 per day + an 8% coinsurance rate rather than the current 10% rate. What is your decision criterion? Would you take the alternative? Why or why not?

8. Cobb-Douglas Higher Premium – lower price Utility increases z M M↑; z↓

9. CES Higher Premium – lower price z and M are better substitutes z M M↑; z↓ M and z are better substitutes, and you’re giving up a lot more z. Lowers the utility.