Question

1. Congratulations! You are employed as an economic consultant to the Baltimore Planning Office, and your task is to estimate the demand for inpatient services in the area. Your estimates indicate that the own-price elasticity of demand equals -0.25, the income elasticity of demand equals 0.45, the cross-price elasticity demand for inpatient services with respect to the price of nursing home services equals-0.2, and the elasticity of travel time equals -0.37. Use this information to project the impact of the following changes on the demand for inpatient services. A. Average travel time to the hospital diminishes by 5% due to overall improvement in the public transportation system. B. The price of nursing home care decreases by 10%. C. Average real income decrease by 10%. D. The hospital is forced to increase its price for service by 2%. 3 (12pt) T T T T E Arial Path: p Words:0

Answer 1

a)

Change in average travel time=-5%

Elasticity of demand with respect to travel time=e_t=-0.37

Change in demand=Change in average travel time*Elasticity of travel time=-5%*(-0.37)=1.85%

Demand will increase by 1.85%

b)

Change in nursing home care services=-10%

Elasticity of demand with respect to price of nursing home care services=e_n=-0.20

Change in demand=Change in nursing home care services*e_n=-10%*(-0.20)=2.00%

Demand will increase by 2.00%

c)

Change in average real income=10%

Elasticity of demand with respect to average real income=e_i=0.45

Change in demand=Change in average real income*e_i=10%*(0.45)=4.50%

Demand will increase by 4.50%

d)

Change in price of services=2%

Elasticity of demand with respect to own price of services=e_p=-0.25

Change in quantity demanded=Change in price of services*e_p=2%*(-0.25)=-0.50%

Quantity of impatient services demanded will decrease by 0.50%