Suppose that the price elasticity for hip replacement surgeries is 0.5. Further

Question

Suppose that the price elasticity for hip replacement surgeries is 0.5. Further suppose that hip replacement surgeries are originally not covered by health insurance and that at a price of $50,000 each, 10,000 such surgeries are demanded each year.

a. Suppose that health insurance begins to cover hip replacement surgeries and that everyone interested in getting a hip replacement has health insurance. If insurance covers 70 percent of the cost of the surgery, by what percentage would you expect the quantity demanded of hip replacements to increase? (Hint: Do not bother to calculate the percentage changes using the midpoint formula. If insurance covers 70.00 percent of the bill, just assume that the price paid by consumers falls 70 percent.)

%

What if insurance covered 95 percent of the price? %

b. Suppose that with insurance companies covering 95 percent of the price, the increase in demand leads to a jump in the price per hip surgery from $50,000 to $70,000.

How much will each insured patient now pay for a hip replacement surgery? $     

Compared to the original situation, where hip replacements cost $50,000 each but people had no insurance to help subsidize the cost, will the quantity demanded increase or decrease? (Click to select)IncreaseDecrease

By how much?

Explanation / Answer

price elasticity indicates if price is increased by x demand is reduced by 0.5x and vice-versa

a)demand increases by 0.5*70 = 35, for 95% insurance, demand increased by 0.5*95% = 47.5

b)each patient should pay = 5% of increased value = 0.05*70000 = 3500$

if there was no insurance demand will decrease, as per original situation now 70% increase in price (which was insurance before) , demand will reduce by 0.5*70 = 35%

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