Question

Suppose that the price elasticity for hip replacement surgeries is 0.2. Further suppose that hip replacement surgeries are originally not covered by health insurance and that at a price of $50,000 each, 10,000 such surgeries are demanded each year.

Instructions: Enter your answers as whole numbers.

a. Suppose that health insurance begins to cover hip replacement surgeries and that everyone interested in getting a hip replacement has health insurance. If insurance covers 70 percent of the cost of the surgery, by what percentage would you expect the quantity demanded of hip replacements to increase? (Hint: Do not bother to calculate the percentage changes using the midpoint formula. If insurance covers 70 percent of the bill, just assume that the price paid by consumers falls 70 percent.)

What if insurance covered 95 percent of the price?

Instructions: Round your answer to 1 decimal place.

b. Suppose that with insurance companies covering 95 percent of the price, the increase in demand leads to a jump in the price per hip surgery from $50,000 to $100,000. How much will each insured patient now pay for a hip replacement surgery?

Compared to the original situation, where hip replacements cost $50,000 each but people had no insurance to help subsidize the cost, will the quantity demanded increase or decrease?

(Click to select)  Increase  Decrease

By how much?

Answer 1

Answer :-

Price elasticity of demand = .2 (negative)

Initial price (P1) = $50000 per surgery

Initial quantity (Q1) = 10000

After insurance covers 30% of the cost. Price falls by 30%.

Price elasticity = % change in quantity surgery demanded /% change in price

% change in quantity of surgery demanded =- .3*(-30%) = 9%

There will be 9% increase in the demand of surgery after price falls by 30% due to insurance.

If insurance covers 85% of the cost. Price falls by 85%.

Price elasticity = % change in quantity surgery demanded /% change in price

% change in quantity of surgery demanded = -.3*(-85%) = 25.5%

There will be 25.5% increase in the demand of surgery after price falls by 30% due to insurance.

B.

If insurance covers 85% cost,

The price of surgery = $900000

Price to be paid by the consumer = 90000*(1-85%) = $13500

Quantity demanded will increase when insurance is given even if the price increases from $50000 to $90000.

without insurance, price paid = $50000

With insurance, price paid = $13500

% change in price paid = (13500-50000)/50000 = -73%

% increase in demand of surgery = -.3*(-73%) = 21.9%

So, there will be increase in demand of 21.9%, when compared to demand of surgery if no insurance was given.