Question

In: Economics

5. You have insurance coverage for drugs. The insurance company will pay 50% of the price...

5. You have insurance coverage for drugs. The insurance company will pay 50% of the price charged by the pharmacy. You went to the store in February, 2019. Due to a very snowy and bad winter, you stock your medicine cabinet with over the counter cold medication. The price of cold medicine was $10 per bottle. You bought 3 bottles for the month. Next month, you found that the pharmacy had raised the price to $12 per bottle. In addition, your insurance policy has also changed to only cover 25% of the price charged by the pharmacy. You bought only 1 bottle. What is the elasticity of demand for cold medicine?

Solutions

Expert Solution

When 50% cost of medicines were covered,the consumer only had to pay 50% of $10 for the medicine.That is $5 for a bottle.

When 25% cost of medicines were covered,the consumer had to pay 75% of $12 for the medicines.That is $9 for a bottle.

P1=$5 Q1=3

P2=$9 Q2=1

∆P=9-5=$4

∆Q=1-3=-2

Ed=(∆Q/∆P)*(P1/Q1)

Ed=(-2/4)*(5/3)

Ed=-.84

In absolute terms Ed=.84.Thus,the demand is inelastic.

Rahul Sunny answered 2 years ago
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