Consider the analysis described in Figure 20.6. Tom and Dick each earn $25,000 per year. Tom has a spouse and two children, and Dick is unmarried. Health insurance and other goods trade off dollar for dollar (there is no tax advantage to health insurance).

(a) Where would each of the two be located on the budget constraint, and why?

(b) Which of the two would more likely take up a health insurance program, such as Medicaid?

(c) How would your answers to the fi rst two parts change if health insurance were subsidized

(as it is) relative to all other goods?

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A Health insurance 0 Values insurance relatively more, V Leads to equilibrium point D D Values insurance relatively less, V, E Leads to equilibrium point E B C M' Increasingly generous public insurance leads to substitution M of public insurance M for private insurance B (crowd-out), or no insurance C (take-up). All other goods Figure 20.6 Analyzing the Economics of Take-Up and Crowd-Out