Question

1. 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?

Answer 1

Answer : Changes in price (P) = 12 - 10 = 2

Changes in quantity (Q) = 3 - 1 = 2

Old price (P1) = $10

Old quantity (Q1) = 3 bottles.

Elasticity of demand (Ed) = (Q / P) * (P1 / Q1)

=> Ed = (2 / 2) * (10 / 3)

=> Ed = 1 * 3.33

=> Ed = 3.33

Therefore, the elasticity of demand for cold medicine is 3.33 .