PracticeProblems1_Elasticity_Reg_Solution.docx - Health...

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Health Economics Practice Problems: RAND HIE and ARC Elasticities The general formula for Elasticity is: ε = PercentageChange Quanty Demanded PercentageChange Price = ΔQ Q Δ P P = ΔQ Δ P P Q this formula will give us the elasticity at a specific reference point on the demand curve (given by the P and Q used), however, what we will focus on is the average elasticity between two points along the demand curve. This average elasticity is called the arc elasticity and is given by the formula below: Use this formula to answer the question below. [ Note: We will go over this exercise together at the start of our next class session, it is intended for practice only, and should not be handed in]. Working with Arc Elasticities 1. Suppose you are collecting 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). Data for 1999 are displayed in Table 1 below. Region Outpatient Visits Price/visit Tokyo 1.0/month $30 Hokkaido 1.2/month $15 Table 1: Outpatient Utilization in Tokyo and Hokkaido, 1999. (a) What is the arc price elasticity of demand for health care consumers in Japan (using only these data)? We are given data on the number of doctor visits and their corresponding prices in Tokyo and Hokkaido prefectures in 1999. Let Q t 1 represent the number of doctor visits and P t 1 the price of doctor visits in Tokyo in 1999. Similarly, let Q h 1 and P h 1 represent the corresponding quantities
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for Hokkaido.
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