Question

Compute the cross elasticity of demand and characterize the goods as complements or substitutes (Please use “Arc Elasticity” to calculate)

a. Regular Flu shot offered by pharmacy Boxes of Tamu Flu sold by pharmacy

Price: $120/shot

Price: $80/shot

Boxes of Tamu Flu sold by pharmacy

540 boxes/week

760 boxes/week

b. Conventional physician visit copay

Price: $80/per cleaning

Price: $120/per cleaning

Alternative medical service visit made

5,400 visits/year

6,600 visit/year

Answer 1

Let the goods are as below:

Regular F. shot = X

Alternative service = Y

Now by using Arc elasticity,

Elasticity = [(QX2 – QX1) / {(QX1 + QX2) 2}] / [(PY2 – PY1) / {(PY1 + PY2) 2}]

                = [(760 – 540) / {(540 + 760) / 2}] / [(120 – 80) / {(80 + 120) / 2}]

                = [220 / (1300 / 2)] / [40 / (200 / 2)]

                = (220 / 650) / (40 / 100)

                = -0.33846 / 0.4

                = 0.85

Since the elasticity is positive, the goods are characterized as substitutes.