Question

In this question you are asked to calculate demand elasticities for health care (If you prefer, you can use STATA to make the calculations.). Suppose you have data from a country (like Japan) where the government sets the price of health care. Each prefecture in Japan has a different set of prices (for example, Tokyo has higher prices than rural Hokkaido). 1) Suppose you observe the following data for 1999:

• average doctor visits per month for Tokyo: 1 visits, and for Hokkaido: 1.5 visits

• price per doctor visit for Tokyo: 20 Yen, and for Hokkaido: 10 Yen

What is the arc price elasticity of demand for health care consumers in Japan (using only these data)? Using your estimated elasticity, what would the demand for health care be if the price in Tokyo were raised to 30 Yen per visit? (10 points)

2) You continue your observations of the Japanese health care system in the year 2000.

For inscrutable reasons having to do with internal Japanese politics, the government changed the price in both Tokyo and Hokkaido that year, and you observe the following demand:

• average doctor visits per month for Tokyo: 0.9 visits, and for Hokkaido: 1.4 visits

• price per doctor visit for Tokyo: 30 Yen, and for Hokkaido: 15 Yen

Use data from both years to calculate the elasticity of demand for health care for Tokyo and Hokkaido separately. Using your estimated elasticities, what would the demand for health care in each prefecture be if the price were raised to 60 Yen per visit next year (for both prefectures)? (10 points)

3) What are the weaknesses of the elasticity estimates you obtained in question 1 and 2? Explain your reason by providing examples that might cause bias in each estimation technique (questions 1 and 2). (Hint: What makes each situation different from a randomized trial?). (10 points)

Answer 1

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