The services of a certified psychologist cost $110 per hour, and an extended hea

Question

The services of a certified psychologist cost $110 per hour, and an extended health plan covers 50 percent of that cost. Under the plan, the clients covered used 625 hours of this service in a typical three-month period. To save money, the extended health plan reduced its coverage to 40 percent of the cost. As a result, the clients covered reduced their use of this service to 482 hours in a typical three-month period.

Based on the data above, calculate the elasticity of demand for the services of a certified psychologist. (Show all of your work to earn full marks.) Interpret the elasticity of demand, and explain the behavior of the clients covered based upon this interpretation.

Explanation / Answer

Services of a certified psychologist cost = $110 per hour

Extended health plan covers 50 percent of that cost, which means

Covered cost = 110*0.50 = $55

Given, clients covered used 625 hours of this service in a typical three-month period.

Also extended health plan reduced its coverage to 40 percent of the cost, which means

Reduced cost = 110*0.40 = $44

The clients covered reduced their use of this service to 482 hours.

Therefore the total cost, C = 55*625 + 44*482 = $55583

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