8.5 Average visits per week equal 640 when the copayment is $40 and 360 when the

Question

8.5 Average visits per week equal 640 when the copayment is $40 and 360 when the copayment is $60.

a. Calculate the percentage change in visits, percentage change in price, and price elasticity of demand using 640 and $40 as the denominators for percentage change calculations.

b. Calculate the percentage change in visits, percentage change in price, and price elasticity of demand using 360 and $60 as the denominators for percentage change calculations.

c. Calculate the percentage change in visits, percentage change in price, and price elasticity of demand using 500 and $50 as the denominator for percentage change calculations. (This calculation finds the arc elasticity.)

d. How do your answers differ?

8.6 Sales are 3,100 at a price of $200 and 2,400 at a price of $300. Calculate the price elasticities of demand using $200 as the base value; then use $300 as the base value. Calculate the arc price elasticity and compare the three calculations. How do your answers differ?

Explanation / Answer

(8.5)

(a)

% change in visits = (360 - 640) / 640 x 100 = - 43.75%

% change in price = (60 - 40) / 40 = 50%

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

= - 43.75% / 50% = - 0.875%

(b)

% change in visits = (360 - 640) / 360 x 100 = - 0.77.78%

% change in price = (60 - 40) / 60 = 33.33%

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

= - 0.77.78% / 33.33% = - 2.33

(c)

% change in visits = (360 - 640) / 500 x 100 = - 56%

% change in price = (60 - 40) / 50 = 40%

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

= - 56% / 40% = - 1.4

(d) From results in parts (a) to (c), it is seen that elasticity calculated using base values as denominators is the lowest in absolute value, while elasticity calculated using changed values as denominators is the highest in absolute value. The Arc price elasticity falls in between these two.

Note: Out of 2 questions, the 1st question is answered with all sub-parts.

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