Question

The table below provides empirical findings from the RAND Health Insurance Experiment. Calculate the elasticity starting with the change from 50 to 100) for Acute Care and Well Care. Assuming acute care is “necessary,” do your elasticities conform to economic theory? Why don’t consumers with “free care” (i.e., a deductible =0) consume more? (Please make a table for your numerical answers—you can do this in EXCEL or on paper and take a picture.)
Deductible   Acute Care Visits   Well Visits
0   300   1000
50   300   900
100   300   500
200   280   250
500   260   200
1000   220   100
2000   200   60

Answer 1

Elasticity of demand = %change in quantity demanded / %change in price

If price change from 50 to 100, there is 100% change in price

%change in quantity demanded for acute visits is 0.

%change in quantity demanded for well visits [(500 - 900) / 900] * 100 = -44.44%

Elasticity of demand for acute visits = (0% / 100%) = 0 which means consumer will consume same amount of quantity even if price change which make demand perfectly inelastic in this range. This confirms that acute care is a necessary good.

Elasticity of demand for well visits [(-44.44)% / 100%] = -0.44 where we can ignore the negative sign due to negative relationship between price and quantity demanded.

Consumers with deductible 0 do not consume more because visiting to doctor frequently does not benefit consumers. People come here when they are ill.