## Question

True/False Explain. Indicate whether each of the following statements is true or false and then explain why you think this. Include in your explanation any pertinent institutional details and economic reasoning (including appropriate graphs and equations). Please provide concise, clear answers with minimal irrelevant detail. Explanation is required.

1. Suppose you are interested in estimating the elasticity of demand for medical care. A bad way to do this would be to compare people who are healthy to people who are sick, and estimate how prices affect the amount of additional care that sick people choose to purchase.

2. According to the model of rational addiction, if the tax on an addictive good increases, it could lead to an increase the number of non-addicted consumers who try the addictive good.

3. Suppose that apples are highly addictive, but lemons are less addictive. A new tax causes the same proportional increase in prices of all fruit. Consider new addicts that become addicted after the introduction of the tax. If a Il addicts are myopic then the fraction of new addicts that are apple addicts will increase, but if all addicts are rational then this fraction will decrease.

B. Analytical Problems

4. An individual has a health insurance plan with a deductible of $1200 and a coinsurance rate of 50%. Their demand curve is Q=20-(P/10), and the equilibrium market price of medical care is $100 per unit. What quantity of medical care would the individual choose to consume?

5. Suppose that consumers are all risk neutral and so they do not purchase health insurance. The equilibrium price of a doctor visit is $30, the supply of doctor visits is perfectly elastic, and the aggregate demand for doctor visits is given by Q=200-5*P. Calculate the effect that universal perfect health insurance (that is, coinsurance rate=0) would have on social welfare.

6. Consider a version of the Akerlof model in which neither buyers nor sellers observe car quality (though somehow - please suspend your disbelief - both buyers and sellers enjoy higher utility from higher quality cars). For this question, please assume that both buyers and sellers recognize that neither can observe car quality.

Sellers' utility function is given by Us = M + Σxi and buyers' utility is given by UB = M + Σ2xi where M is the level of consumption of non-car goods and X; is the quality level of car, and there is a uniform distribution of quality of the cars held by sellers, xi ~ U[0,20].

In this market, is there is a price, p, at which all cars will sell? If not, prove there is no such price. If so, calculate what prices will work.

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