Need help answering question 3.

Context:

1. Suppose that consumers spend their income on either health insurance or on a

"composite good" (a collection of all other goods that a consumer wants). Find the

optimal bundle of health insurance (HI) and other goods (G) given the following

budget constraint and utility function. Make sure to show how you arrived at your

answer. How much utility does this bundle give the individual?

Budget constraint: 1000 = 100*HI + 25*G

Utility function: U=HI*G where MRS = -G/HI

2. Now assume that Medicaid is introduced. Medicaid is a public health insurance

program for the poor. Assume that the individual described above is eligible.

Medicaid offers a fixed bundle to the eligible: they can have 3 units of health

insurance for no cost. If an individual elects to be covered by Medicaid, they cannot

purchase additional health insurance; they are limited to the 3 units provided by

Medicaid.

a. Does the individual described above choose to enroll in Medicaid? Use

graphs and thoroughly justify your answer.

b. Does their consumption of health insurance go up or down with the

introduction of Medicaid?

3. Now imagine someone who has preferences such that, in the absence of Medicaid,

they choose to optimally purchase no health insurance. On a new graph draw the

budget constraint given above and sketch an indifference curve for a person who

optimally chooses to be uninsured in the absence of the Medicaid program.