Question

Careforall, The mayor of sickcity, claimed that his residents are very elastic and highly sensitive when the price of preventative care changes but not so sensitive when the price of inpatient care changes. To prove her point she referred back to the RAND studies. She claimed that the results of a replicated study in her town are shown below

Plan Average # of preventative care visits Average # of inpatient visits

Free 3.2 0.126

25% 2.54 0.122

50% 2.10 0.118

Careforall claimed that the best solution for her city is to provide free health care for all. The insurance companies replied that they will not be able to provide such a service. As a health adviser, you need to draft a proposal where you can design a health coverage that will be optimum for the citizen and provide insurance companies with a profitable market. Assume that the average cost of a preventative visit is $75 and the average cost of an inpatient care is $2700 and that the current plan ask patients to contribute 25% of the cost as a copay.

Answer 1

Given data:

The mayor of sick city, claimed that his residents are very elastic and highly sensitive when the price of preventative care changes but not so sensitive when the price of inpatient care changes.

To prove her point she referred back to the RAND studies. She claimed that the results of a replicated study in her town are shown below

Plan Average # of preventative care visits Average # of inpatient visits

Free 3.2 0.126

25% 2.54 0.122

50% 2.10 0.118

Find the price elasticity of demand for preventative care in Sickcity. Round to 3 digits after the decimal

Plan average number of preventive care visits:

We know price elasticity of demand = %change in demand / % change in price

We have from 25%to 50%,

Percentage change in price = 50 – 25 = 25%

% change in demand = ( (210 – 254) / 21)* 100 = -20.95

Price elasticity of demand = -20.95 / 25 = -0.838