SEE ATTACHMENT URGENT
1. Draw the demand curve for health insurance in a diagram that has the insurance premium
on the y-axis and quantity on the x-axis. Please interpolate the points linearly to get to a
derive a continuous demand curve.
2. Now derive the average cost (average expense) curve of the health insurer per enrollee. We
assume that health expenses are the only expense for the insurer. Notice that the average
expense per enrollee will depend on the premium that the insurer charges. Please interpolate
the points linearly to get to a continuous average cost curve.
3. Now add the marginal cost (marginal expense) curve to the diagram. Please interpolate the
points linearly to get to a continuous marginal cost curve.
4. Describe the equilibrium outcome (premium and quantity) under perfect competition. Display
the outcome in the diagram and quantify premium and quantity.
5. Is there a welfare loss? If so describe it graphically and explain.
6. Let’s consider imposing a tax penalty of $1,000 for the uninsured. How does that change the
demand curve? Show it graphically. Does the tax penalty increase social welfare?
7. What is the minimal tax penalty that is necessary to achieve the social optimum?
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