This is your chance to calculate demand elasticities for health care. 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). suppose you observe the following data for 1999: outpatient visits price/visit tokyo 1.25/month 20 yen hokkaido 1.5/month 10 yen what is the arc price elasticity of demand for health care consumers in japan (using only these data)?

Arc price elasticity of demand = -0.273

Explanation:

This problem is solved as follows:

1. Identify the data.

                   Outpatient visit       Price / visit

Tokyo           1.25 / month                  20y

Hokkaido      1.5 / month                   10y

Outpatient visits equal the quantities demanded of the service. Therefore, we can say that:

Qt (Outpatient visits in Tokyo) = 1.25 / month

Qh (Outpatient visits in Hokkaido) = 1.5 month.

With the following prices:

Pt (Price in Tokyo) = 20y

Ph (Price in Hokkaido) = 10 y

2. Apply the formula to calculate arc-elasticity of demand:

We replace the data:

Final -0.27275 or -0.273

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