Elasticity Review Group Problem Set #3

| November 24, 2016

Elasticity Review

**The midpoint formula is your friend. Use it “informally” to plug numbers in for these problems to help with arriving at the correct answer.**

1. Your boss tells you that the price elasticity of demand is -0.89 for immunizations. She claims that this means your clinic can raise prices and there will be no change in demand for immunizations. Explain whether she is correct or incorrect.

2. Your boss tells you that the price elasticity of demand for hospital services is inelastic and therefore if you change the price there will be no change in the demand for hospital services. Explain whether she is correct or incorrect.

3. The price elasticity of demand for a medical service is -0.5.

a. Is demand elastic, inelastic, or unitary elastic – and why?

b. If price increases, what will happen to the quantity demanded? How do you know?

c. If we reduce prices by 6%, what will be the impact on quantity demanded (show your work).

d. Will total revenues increase or decrease if we reduce prices?

e. What approximate change in revenues can we expect if price decreases by 6%?

4. Medical products have an income elasticity of 0.45.

a. If income increases, what will happen to the quantity demanded? Explain your rationale.

b. Is this medical product a normal good or an inferior good? Explain your rationale.

c. If we reduce income by 18%, what will be the impact on quantity demanded (show your work)?

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