Instructions: To be answered in 2-4 well-written paragraphs 1. In this course, we’ve discussed a variety of ways that moral hazard affects the…

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Throughout this question, assume that physicians (not patients) determine the choice of treatment and that patients are fully insured. Also, assume physicians value the health of their patients half as much as their patients do. 

a)    Which is the efficient treatment for these patients? How much economic surplus is created from this choice?

b)    If a physician operates as a “good agent” for their patient (i.e. always chooses the treatment the patient would want them to choose), which treatment would they choose? How much economic surplus is created from this choice?

c)    Suppose physicians are paid an amount equal to the cost of treatment for whichever treatment the physician chooses to provide. Which treatment will the physician choose? How much economic surplus is created from this choice?

d)    Suppose physicians are paid a fixed payment set to $35,000 regardless of the treatment they choose. Which treatment will the physician choose? How much economic surplus is created from this choice?

e)    Is it efficient for physicians to act as “good agents” for their patients?

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