Use the information in Table 8.4 to construct a graph of the long-run average cost function for health insurance administration. Assume that a particular benefit costs $1,000 to provide. Use the total percentages in the table to compute the dollar cost of administering that coverage.
a. Plot the administrative cost of coverage as a function of the number of employees. (Use the midpoints of the first eight cells. For the unbounded cell of 10,000 or more just plot the cost at 10,000.)
b. Explain what the graph of administrative costs indicates regarding scale economies.
c. Suppose that you are a state senator confronted with two policy proposals. Proposal A would shift health insurance coverage from being employment-based to being entirely individual. Proposal B would shift coverage to communities with each city of your state providing coverage for its residents. Compare the economic aspects of the two proposals in terms of the costs of administering insurance plans under the two options.