What is the socially optimal number of flu shots

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Reference no: EM13183673

Assume that the marginal cost (supply) of influenza vaccinations is constant at $40. Assume that everyone in society has health insurance that pays 80% of all medical services, including flu shots. Assume first that the flu is not contagious. Define by q the number of people who get flu shots and assume that the (inverse) market demand for flu shots is given by P =100 - q.

(i) What is the socially optimal number of flu shots?

(ii) How many flu shots will be provided in this market given the insurance?

(iii) Calculate the deadweight loss caused by the health insurance.

(iv) How should a health insurance provider respond to the inefficiency presented in this problem? Assume now that the flu is contagious and that getting a flu shot makes it impossible to catch the flu. Assume further that the probability p of catching the flu is given by x/100, where x is the number of people who do not get a flu shot. Suppose that the cost of getting flu is given by C, so that the expected cost CE to society is xC/100.

(v) What is the value CE such that the market outcome obtained in part (ii) is socially optimal? (hint: Compute expected total cost of getting the flu. Benefit of shots is then the costs avoided)

Reference no: EM13183673

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