Question

Suppose you are collecting data from a country like Japan where the government sets the price of health care. Each prefecture in Japan has a different set of prices (for example, Tokyo has higher prices than rural Hokkaido). Data for 1999 is displayed in Table 2.12. 11 Table 2.12. Outpatient utilization in Tokyo and Hokkaido, 1999. RegionOutpatient visits Price/visit Tokyo 1.25/month Hokkaido 1.5/month 20Y 10¥ What is the arc price elasticity of demand for health care consumers in Japan (using only this data)? Suppose that incomes are generally much higher in Tokyo than Hokkaido. Is your answer to the last question an overestimate or underestimate of price elasticity? Justify your answer. [Hint: It may be helpful to plot the data points from Table 2.12 and consider likely demand curves for Tokyo and Hokkaido.] a b

Need help, please show work

Answer 1

a) ARC price elasticity of demand = [Change in quantity /average quantity)/ (change in price/average price)] = [(1.5 - 7.25)/(1.25 + 1.5) /2/(10 - 20)/ (20 + 10)/2] = (0.25 /1.375) /(-10/15) = 3.75 /13/75 - 0.27 b) Suppose that incomes are generally higher in tokyo than Hokkaido But also the price in tokyo is double the price in Hokkaido. Therefore, price elasticity of demand is not under estimated or overestimated C) Price elasticity of demand = % Change in Quantity demanded/% Change in price (1) When price in Tokyo is increased by 30%, - 0.27 = % Change in Quantity demanded/30% % Change in Quantity demanded = (- 0.27) x 30% = -8.1% In Tokyo, new demand will be = 1.25 x (1 - 0.081) = 1.25 x 0.919 = 1.15 visits per month

C) Price elasticity of demand = % Change in Quantity demanded / % Change in price

(1) When price in Tokyo is increased by 30%,

- 0.27 = % Change in Quantity demanded / 30%

% Change in Quantity demanded = (- 0.27) x 30% = - 8.1%

In Tokyo, new demand will be = 1.25 x (1 - 0.081) = 1.25 x 0.919 = 1.15 visits per month

Please rate the answer