Problem Set 3

UI, DI and WC

Problem 1. What does the empirical evidence on the consumption-smoothing benefits of UI

indicate about the degree to which individuals are, on average, insured against the income losses
associated with unemployment?

Problem 2. Governments typically provide DI and UI to workers. In contrast, governments

typically mandate that firms provide workers’ compensation insurance to their workers but do not
provide the coverage. Why the difference? Why don’t governments provide workers’ compensation
instead of mandating it?

Problem 3. Are individuals more likely to maintain their pre-injury consumption levels after an
easily preventable on-the-job injury than after a difficult-to-prevent on-the-job injury? Explain.

Health Insurance

Problem 4. An individual’s demand for physician office visits per year is Q = 10–(1/20)P , where
P is the price of an office visit. The marginal cost of producing an office visit is $120.

(a) If individuals pay full price for obtaining medical services, how many office visits will they
make per year?

(b) If individuals must pay only a $20 copayment for each office visit, how many office visits will
they make per year?

(c) What is the deadweight loss to society associated with not charging individuals for the full
cost of their health care?