Reference no: EM133078762

1. Suppose the country's national health insurance authority cuts the price it pays physicians for performing a procedure. Use a goods-leisure analysis (goods or income on one axis and leisure on the other) to answer the following questions:

a. A backward-bending supply curve of labor can be derived from the indifference curve analysis of goods and leisure. Explain using graphs (one for the indifference curve analysis and the other for the supply of labor function corresponding to the indifference curve analysis).

b. Isolate income and substitution effects from a decrease in the wage rate. (Note: In isolating the income and substitution effect, the practice is to draw a line parallel to the new price line and tangent to the indifference curve where the person was before the price change.)

c. Now assume that Medicare is the only payer. Medicare decreases the unit price of a service from $34 to $24. Show how the goods-leisure analysis is useful for addressing this question. (You will need to translate price per unit of service into work hours. Just make an assumption and state what it is.)