Question

The price elasticity of physician office visits is -0.1. If price decreases by 10%, TOTAL EXPENDITURES on outpatient visits will:

a. increase by 0.1% b. increase by 10% c. decrease by 10% d. decrease by 0.1% e. No change in expenditures.

Answer 1

Price elasticity of demand =%change in quantity/%change in price

-0.1=%change in quantity/(-10)

%change in quantity =-0.1*(-10)=1%

the quantity increases by 1%

------

suppose there were 10 visits at P=10 the after 10% decrease in price the price is $9 and quantity increases by 1% which is 10. units

revenue =price *quantity

old revenue =10*10=100

new revenue =9*10.1=90.9

change in revenue =90.9-100=-9.1

the %change in revenue =(change /old revenue)*100

=(-9.1/100)*100

=-9.1

the minus sign shows the decrease and the revenue decreases by 9.1 %, approximately it is 10%

option C