Question

Use a graph to illustrate how the following changes would affect the demand curve for inpatient hospital services at a hospital in a large city.

a) The Government decided to lower the taxes on inpatient hospital services.” Explain. (5 points)

b) Food and Drug Administration makes the following declaration: “From now on, pharmacists can prescribe and sell all types of prescription drugs.” Explain! (5 points)

c) The price of magnetic resonance imaging (MIR) declined by 90% due to a new technological innovation; the cross-price elasticity of demand between MRI services and inpatient hospital services is -0.687. Explain. (5 points)

Answer 1

a) A fall in taxes on inpatient hospital services will shift the demand curve for inpatient hospital services rightwards as a lower tax would encourage more people to avail the services of the hospital. The increased demand will lead to a rise in the quantity demanded from Q1 to Q2.

b) If pharmacists are allowed to prescribe and sell all types of prescription drugs, then the demand for inpatient hospital services would fall as people would now prefer to go to the pharmacies directly rather than visitng the doctors in the hospital. the demand curve will shift leftwards.

c) The fall in the price of magnetic resonance imaging (MIR) by 90% due to a new technological innovation will lead to a rise in the demand for hospital services. This is because MIR and hospital services are complementary goods (the sign of cross price elasticity of demand is negative when the goods are complements, so a fall in the price of one good leads to a rise in the demand for the other). The demand curve will shift rightwards, leading to a rise in quantity demanded.