Microeconomics 19th Edition by Campbell McConnell,Stanley Brue,Sean Flynn

Exercise 1

Suppose that the price elasticity for hip replacement surgeries is 0.2. Further suppose that hip replacement surgeries are originally not covered by health insurance and that at a price of $50,000 each, 10,000 such surgeries are demanded each year.
a. Suppose that health insurance begins to cover hip replacement surgeries and that everyone interested in getting a hip replacement has health insurance. If insurance covers 50 percent of the cost of the surgery, by what percentage would you expect the quantity demanded of hip replacements to increase? What if insurance covered 90 percent of the price? (Hint: Do not bother to calculate the percentage changes using the midpoint formula given in Chapter 4. If insurance covers 50 percent of the bill, just assume that the price paid by consumers 50 percent.)
b. Suppose that with insurance companies covering 90percent of the price, the increase in demand leads to a jump in the price per hip surgery from $50,000 to $100,000. How much will each insured patient now pay for a hip replacement surgery? Compared to the original situation, where hip replacements cost $50,000 each but people had no insurance to help subsidize the cost, will the quantity demanded increase or decrease? By how much?