Post by: ncasson210 on Nov 23, 2022
In the United States, health care costs are paid by a third-party, which results in a higher demand for medical services than with other health care systems. The graph shows the supply curve (S), the demand curve when consumers pay the full price (D1), and the demand curve with a third-party payer system (D2).
Assume that P1=$65.50, P2=$99.00, P3=$120.50, P4=$144.00, Q1=34, and Q2=64. The third-party payer system leads to an ________ (underproduction/overproduction) of medical services by ________ and a ________ (decrease/increase) in the market price by ________.
◦ underproduction, 30, decrease, $55.00
◦ overproduction, 64, decrease, $55.00
◦ overproduction, 30, increase, $21.50
◦ underproduction, 64, increase, $21.50
Post by: sadoniam on Nov 23, 2022
If consumers pay the full price of medical services, equilibrium occurs where the supply curve (S) intersects the demand curve when consumers pay the full price (D1), at a price of P2=$99.00 and a quantity of Q1=34.
With the third-party payer system, however, consumers do not pay the full price which leads them to demand more medical services at each price (seen as a rightward shift of the demand curve to D2). In this case, the market equilibrium is at a price of P3=$120.50 and a quantity of Q2=64.
Therefore, the third-party payer system leads to an overproduction of medical services (from Q1=34 to Q2=64) by Q2 - Q1 = 64 - 34 = 30 and an increase in the market price (from P2=$99.00 to P3=$120.50) by P3 - P2 = 120.50 - 99.00 = $21.50.