Rising Outcasts Challenge. Given the following data on the number of customers buying BlueCross/BlueShield health insurance...

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

Calculate the point price elasticity of demand for health insurance when price decreases from $900 to $600. (10pts)
Calculate the point price elasticity of demand for health insurance when price increases from $600 to $900. (10pts)
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)

Solutions

Expert Solution

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.

Rahul Sunny answered 2 years ago

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