Suppose that doctors’ visits cost $20, and the typical consumer has an income of $100. Consumers spend all of their incomes on doctors’ visits and a “composite good” that costs $1 per unit.

(a) Draw a graph that illustrates the consumer’s budget constraint, putting doctor’s visits on the horizontal axis. Make sure you indicate the horizontal and vertical intercepts.

Now, suppose the local government is considering two health plans. Under plan A, the government will give out vouchers worth two free visits to the doctor. Under plan B, the government will give out four 50% coupons to be used at the doctor’s office.

(b) Draw the new budget constraint the consumer faces under plan A.

(c) Draw the new budget constraint the consumer faces under plan B.

(d) For whom is the choice of plan A or plan B not likely to matter - those who are quite well, or those who are quite sick?

(e) Which plan would someone who is generally well be likely to choose, if offered a choice?