Question

Congratulations! You are employed as an economic consultant to the Baltimore Planning Office, and your task is to estimate the demand for inpatient services in the area. Your estimates indicate that

the own-price elasticity of demand equals –0.5,

the income elasticity of demand equals 0.4,

the cross-price elasticity demand for inpatient services with respect to the price of nursing home services equals –0.2, and

the elasticity of travel time equals –0.4.

Use this information to project the impact of the following changes on the demand for inpatient services.

A. Average travel time to the inpatient diminishes by 5% due to overall

improvement in the public transportation system.

B. The price of nursing home care decreases by 10%.

C. Average real income decrease by 10%.

D. The inpatient is forced to increase its price for service by 2%.

Which of the following is correct?

a. A, B, C, and D Respectively would be 1%, 2%, 4%, 1%

b. A, B, C, and D Respectively would be 2%, 2%, 4%, 1%

c. A, B, C, and D Respectively would be 2%, 2%, 1%, 4%

d. A, B, C, and D Respectively would be 4%, 2%, 2%, 1%

Answer 1

Ans. Option b

Own Price Elasticity of demand = %Change in Quantity Demanded/ %Change in Price level

Income Price Elasticity of demand = %Chnage in Demand / %Change in Income

Cross Price Elasticity of demand = %Change in Demand / %Change in Price of Other good

Travel time elasticity of demand = %Change in Demand/ %Change in Travel Time

Using the above formulas, we can calculate each part's demand as,

A. % change in demand = -0.4*(-5) = 2%

Thus, demand increases by 2%

B. % change in demand = -0.2*(-10) = 2%

Thus, demand increases by 2%

C. % change in demand = 0.4*(-10) = -4%

Thus, demand decreases by 4%

D. % change in demand = -0.5*(2%) = -1%

Thus, demand decreases by 1%

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