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Demand Elasticity
Your clinic has conducted market research and surveyed patients in two neighboring communities. You find community members in Arkham City (where your clinic is located) pay $55 per procedure after insurance and in Rapture City the average post-insurance price is $40 per procedure. a.Average, annual, per capita procedures are 0.5 in Arkham and 0.7 in Rapture. Calculate the arc elasticity of demand using these figures.
b.Your clinic manager suggests raising post-insurance procedure prices by 5% to cover a 5% increase in building costs. Will this strategy work? Explain.
c.If you follow your clinic manager's advice and raise prices by 5% how many procedures would your clinic expect to do on average?
d.While some of your patients do come from Rapture, many of them go to other, cheaper clinics in the region. Your are concerned that the estimates of demand may be biased. What might be a source of bias?
e.Given the source of bias you stated in Part D, would the calculation in Part A be too elastic or not elastic enough? Why?
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