In the event he requires an appendectomy, David s demand for hospital accommodations is as shown in the diagram. David s current insurance policy fully covers the cost of hospital stays. The marginal cost of providing a hospital room is $150 per day. a. If David s only illness this year results in an appendectomy, how many days will he choose to stay in the hospital? b. By how much would total economic surplus have been higher this year if David s hospital insurance covered only the cost of hospital stays that exceed $1,000 per illness? c. Suppose David s employer adopts a new health care plan that pays 50 percent of all medical expenses up to $1,000 per illness, with full coverage thereafter. How will economic surplus under this plan compare with economic surplus with the policy in Part b?
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In the event he requires an appendectomy, David s demand for hospital accommodations is as shown in.