# hw1soln - Fall 2011 UGA PADP 6950 Fertig Homework 1...

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Unformatted text preview: Fall 2011 UGA PADP 6950 Fertig Homework 1 Solutions 1. Find the optimal bundle ofhealth insurance [ill] and othergoods (G) given the following budget constraint and utilityfunction. Budget constraint: 1500 2' 150*Hi + 25*G Utilityfunction: U=Hl*G where U=150 Budget: 1500:150Hi+25G 250:1500—150H1 2* 0:60~6Hl 9H1 ranges btwn 0 and 10 (00 " lH*G=150 GnlSO/Hl Utility: The otimal bundle is 5,30 . , to i lirtcmli' - Me data/{d 2. Now assume that Medicaid is introduced. Medicaid is a public health insurance program for the poor. Assume that the individual described above is eligible. Medicaid offers aﬂxed bundle to the eligible: they can have 3 units ofhealth insurancefor no cost. Assume that people cannot buy both Medicaid and private health insurance. a. Does the individual described above choose to enroll in Medicaid? Explain your answer with graphs. Because a person can’t buy both Medicaid and private health insurance, Medicaid introduces a new point to the affordable budget set [does not shift the line). lithe eligible individual takes Medicaid, Him-«3 and she can now use all oftheil‘ \$1500 to consume G. The max G you can consume with \$1500 is 60 at a price of\$25. So, Medicaid allows an individual to have point (3,60), which they could not attain previously. The point (3,60) is beyond the current indifference curve [see graph above] so ifthis individual [with these preferences] were offered Medicaid, her utility would go up we know this because she can achieve a higher indifference curve at this point]. So, she would enroll in Medicaid. b. Does their consumption ofheaith insurance 90 up or down with the introduction ofMedicaid? Before Medicaid was offered, H125. After Medicaid is offered, Hl=3. So, . Side note: We cali this "crowd~out”. Policymakers are afraid that when they expand eiigibility or create a new public insurance program, people will choose to leave their private insurance plan and sign up for the pubiic plan, costing the government a lot and not helping the people the policy was intended to help [the uninsured]. Draw a separate graph with the budget constraint given above with an indifference curve of someone who chooses to be uninsured in the absence of the Medicaid program. R M’Z/MWW. Megawai g Weeﬂ . af— f/fﬁ? We we ...
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## This note was uploaded on 01/18/2012 for the course PADP 6950 taught by Professor Fergi during the Spring '11 term at University of Georgia Athens.

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hw1soln - Fall 2011 UGA PADP 6950 Fertig Homework 1...

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