Question

Suppose that the average out of pocket cost for visiting an urgent care center increased from $40 per visit to $60 per visit and the number of visits at the urgent care center fell from 1,000 visits per month to 850. Use this information to calculate the price elasticity of demand. Was the price increase a good business decision? Explain.

Answer 1

The price elasticity of demand is -0.36, indicating relatively inelastic demand. The price increase may be a good business decision.

Step-by-step explanation:

The price elasticity of demand can be calculated using the formula: Percentage change in quantity demanded divided by the percentage change in price.

In this case, the percentage change in quantity demanded is calculated as (850-1000)/(850+1000)/2 * 100 = -18%.

The percentage change in price is calculated as (60-40)/(40+60)/2 * 100 = 50%.

Using these values, we can calculate the price elasticity of demand as -18%/50% = -0.36.

Since the price elasticity of demand is negative, it indicates that the demand is relatively inelastic. This means that the quantity demanded is not very responsive to changes in price. Therefore, the price increase may be a good business decision as it resulted in a decrease in the number of visits, but an increase in the average out of pocket cost per visit.