Question

Rising Outcasts Challenge. Given the following data on the number of customers buying BlueCross/BlueShield health insurance with respect to its price.

Insurance Price	Number of Customers
$900	5
$800	10
$700	20
$600	35

1. Calculate the point price elasticity of demand for health insurance when price decreases from $900 to $600. (10pts)
2. Calculate the point price elasticity of demand for health insurance when price increases from $600 to $900. (10pts)
3. Using the mid-point formula, calculate the price elasticity of demand for Blue Cross-Blue shield health insurance, when its price increases from $600 to $900, and decreases from $900 to $600.  If you got a different result from a) or b) above, explain why. (20pts)

Answer 1

Point price elasticity (Ed) = % Change in quantity / % Change in price

Midpoint elasticity (Ed) = (Change in quantity / Average quantity) / (Change in price / Average price)

When P = 900, Q = 5 & when P = 600, Q = 35

(1) Price decreases from 900 to 600: Point method

Ed = [(35 - 5) / 5] / [(600 - 900) / 900]

= (30 / 5) / (- 300 / 900)

= - 18

(2) Price increases from 600 to 900: Point method

Ed = [(5 - 35) / 35] / [(900 - 600) / 600]

= (- 30 / 35) / (- 300 / 600)

= - 1.71

(3) Midpoint method:

(i) Price decreases from 900 to 600

Ed = [(5 - 35) / (5 + 35)] / [(600 - 900) / (600 + 900)]

= (- 30 / 40) / (300 / 1500)

= - 3.75

(ii) Price increases from 600 to 900

Ed = [(35 - 5) / (35 + 5)] / [(900 - 600) / (900 + 600)]

= (30 / 40) / (- 300 / 1500)

= - 3.75

(4) Midpoint method gives different results because, point estimates depend on choice of the base (initial) values but midpoint method is independent of choice of the base (initial) values.