Average visits per week equal 640 when the copayment is $40 and 360 when the cop

Question

Average visits per week equal 640 when the copayment is $40 and 360 when the copayment is $60. a. Calculate the percentage change in visits, percentage change in price, and price elasticity of demand using 640 and $40 as the denominators for percentage change calculations. b. Calculate the percentage change in visits, percentage change in price, and price elasticity of demand using 360 and $60 as the denominators for percentage change calculations. c. Calculate the percentage change in visits, percentage change in price, and price elasticity of demand using 500 and $50 as the denominator for percentage change calculations. (This calculation finds the arc elasticity.) d. How do your answers differ?

Explanation / Answer

Price elasticity of demand, eP = % Change in visits / % Change in price

(a)

eP = [(360 - 640) / 640] / [$(60 - 40) / $40] = (- 280 / 640) / (20 / 40) = - 0.4375 / 0.5 = - 0.875

(b)

eP = [(640 - 360) / 360] / [$(40 - 60) / $60] = (280 / 360) / (- 20 / 60) = 0.7778 / - 0.3333 = - 2.33

(c)

eP = [(640 - 360) / (640 + 360) / 2] / [$(40 - 60) / $(40 + 60) / 2] = (280 / 500) / (- 20 / 50) = 0.56 / - 0.4 = - 1.4

(d)

Absolute value of elasticity is highest for case (b) and lowest for case (a).

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.