11 Bhattacharya Ch2 Suppose you are collecting data from a c

11. (Bhattacharya Ch2) Suppose you are collecting data from a country like Japan where the government sets the price of health care. Each prefecture in Japan has a different set of prices (for example, Tokyo has higher prices than rural Hokkaido). Data for 1999 are displayed in Table 2.12. Table 2.12: Outpatient utilization in Tokyo and Hokkaido, 1999. Region Outpatient visits Price/visit Tokyo Hokkaido 1.25/month 1.5/month 20¥ 10¥ What is the arc price elasticity of demand for health care consumers in Japan (using only these data)? a. b. Suppose that incomes are generally much higher in Tokyo than Hokkaido. Is your answer to the last question an overestimate or underestimate of price elasticity? Justify your answer.

Solution

a. ARC price elasticity of demand =[ (change in quantity/average quantity) / (change in price / average price)]

= [(1.5 -1.25) / (1.25 +1.5)/2 ] / [(10-20) /(20+10)/2 ]

= (0.25 /1.375) / (-10/ 15)

=- 3.75 / 13.75

= -0.27

b. Suppose that incomes are genrally higher in Tokyo than Hokkaido. But also the price in Tokyo is double the price in Hokkaido. Therefore, price elasticity of demand is not underestimated or overestimated.