Problem 2: Health care reform
One of the central elements of the Obamacare reform was to require US citizens to purchase a
minimum level of health insurance, say x1
1. In a two-way diagram with health insurance on the horizontal axis and all other goods on the
vertical axis, explain how the health care reform may have aﬀected the utility of a US citizen.
Please discuss according to where her consumption bundle lied prior to the reform. Be sure to
identify the new budget set, taking due account of the requirement to purchase the minimum
quantity of health insurance. You can assume that the prices of insurance and other goods are
unaﬀected by the reform.
An objective measure of the loss in utility of those citizens who lose from the reform is the
equivalentvariation, that is, the decrease in income that would have brought them to the same lower utility
level as the reform, but without them having to purchase the minimum amount of insurance x1
2. Explain how to identify this increase in income graphically, and show it on your diagram.