Question

Income and the Price Elasticity of Demand for Medical Care. Like many other developing​ nations, Peru subsidizes medical​ care, charging consumers a small fraction of the cost of providing services such as visits to medical clinics. The price elasticity of demand for medical care is 0.67 for poor households but only 0.03 for wealthy households.

Suppose the government reduced its subsidies for medical​ care, and the price to consumers increased by

20

percent.

The changes in the quantity of medical care demanded for poor households would be

nothing

percent ​(enter your response rounded to one decimal​ place) and

nothing

percent for wealthy households ​(enter your response rounded to one decimal

​place).

Answer 1

• Price elasticity of demand for medical care is 0.67 for poor household which suggests that demand is inelastic. Further, elasticity of demand for wealthy class is given as 0.03, it also suggests that demand is inelastic in this segment as well.
• Furthermore, there is 20 % rise in price level.
• 20 % rise in price would cause 13.4 % (20*0.67) fall in demand for medical care in poor segment.
• On other hand, in wealthy class 20 % rise in price would cause only 0.6 % (20*.03) fall in demand for medical services.