Suppose a health clinic is providing health services to a rural community. The m

Question

Suppose a health clinic is providing health services to a rural community. The manager of the clinic knows that there are customers who have a more substantial ability to pay for doctor visits, while another much lower income group of consumers has much lower ability to pay. She estimates that the elasticity of demand for doctor appointments for the higher income group is -1.5, while the elasticity of demand for doctor appointments for the low-income group is -3.5. If the marginal cost of a doctor visit is $10, what price should the clinic charge to the two different groups? Use the pricing rule of thumb to determine the optimal prices to charge these two different groups. In addition, discuss the conditions under which this would be feasible.  

Explanation / Answer

To calculate the price for two different groups, we need to use the price mark up formula.

Price = [e / (1 + e)] * MC

E = price elasticity of demand.

So, for higher income group,

Price = [(- 1.5) / (1 - 1.5)] * $10

Price = 3 * $10 = $30.

Similarly for lower income group,

Price = [(-3.5) / (1 - 3.5)] * $10

Price = 1.4 * $10 = $14.

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