Question

Consider a firm with a fixed-size production facility as described by its existing cost curves. a. Explain what would happen to those cost curves if a mandatory health insurance program is imposed on all firms. b. What would happen to the cost curves if the plan required the firm to provide a health insurance program for each employee worth 10 percent of the employee’s salary? c. How would that plan compare to one that requires each firm to provide a $100,000 group program that would cover all employees in the firm, no matter what the number of employees was?

Short answer

#Answer# The introduction of a mandatory health insurance program will shift a firm's cost curves upwards, including total cost (TC), variable cost (VC), average total cost (ATC), and marginal cost (MC) curves. The specific shift will depend on the characteristics of the insurance plan, such as whether it is a 10% salary program or a $100,000 group program. The 10% salary program has varying insurance costs depending on employees' salaries, while the $100,000 group program allocates the entire insurance cost to the firm as a whole, allowing the cost per employee to decrease as the number of employees increases. The firm's ability to efficiently allocate the insurance cost will also affect the magnitude of the shift in the cost curves.

Step-by-step solution

Part A: Imposing a Mandatory Health Insurance Program

If a mandatory health insurance program is imposed on all firms, the total cost of production will increase for the firm due to the additional cost of providing the health insurance. As a result, both the total cost (TC) and variable cost (VC) curves will shift upwards. This shift will lead to a change in both average total cost (ATC) and marginal cost (MC) curves. These two cost curves will also shift upwards because the extra cost of providing the insurance gets distributed among all units of production.

Part B: Health Insurance Program Worth 10% of Employee's Salary

In this case, the cost of providing health insurance to each employee is proportional to their salary. This means that the additional amount spent on health insurance will also vary depending on the salary of the employees. Consequently, an increase in wages will result in an increase in the insurance cost, leading to an upward shift in both total cost (TC) and variable cost (VC) curves. Similar to Part A, the average total cost (ATC) and marginal cost (MC) curves will also shift upwards.

Part C: Comparing the Two Health Insurance Programs

When comparing the $100,000 group health insurance program with the 10% salary program, the main difference is how the cost of health insurance is allocated among employees. In the 10% salary program, the cost of insurance is proportional to each employee's salary, resulting in varying insurance costs for different employees. This program could incentivize the firm to hire more lower-wage workers as the insurance cost would be lower for them. On the other hand, the $100,000 group program allocates the entire insurance cost to the firm as a whole. This means that the insurance cost per employee will decrease as the number of employees increases. The cost curve shift will depend on the size of the firm and its ability to distribute the insurance cost among a higher number of employees. If a firm can efficiently allocate the insurance cost, the shift in the cost curves may be minimal. In conclusion, the introduction of a mandatory health insurance program will shift the cost curves upward. However, the magnitude of the shift will depend on the specific insurance plan (10% salary program or $100,000 group program) and how effectively the firm allocates the insurance cost among its employees.