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.

Calculate the total cost of providing this insured service to the plan before and after the change in coverage. (Show all of your work to earn full marks.)

4 marks

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

The services of a certified psychologist cost $110 per hour

An extended health plan covers 50 percent of that cost i.e. 110*0.50 = 55

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

An extended health plan reduced its coverage to 40 percent of the cost i.e. 110*0.40 =44

the clients covered reduced their use of this service to 482 hours in a typical three-month period.

Then the total cost is 55*625 +44*482 = $ 55583

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