You estimate that the price elasticity of demand for clinic visits is −0.25. You anticipate that a major insurer will increase the copayment from $20 to $25. This insurer covers 40,000 of your patients, and those patients average 2.5 visits per year. What is your forecast of the change in the number of visits?
To forecast the change in the number of visits, we can use the concept of price elasticity of demand. Price elasticity of demand measures the responsiveness of quantity demanded to a change in price.
In this case, the price elasticity of demand for clinic visits is given as -0.25. A negative value for price elasticity of demand indicates that there is an inverse relationship between price and quantity demanded. This means that as the price of clinic visits increases, the number of visits is expected to decrease.
To calculate the change in the number of visits, we can use the following formula:
% Change in Quantity Demanded = Price Elasticity of Demand * % Change in Price
First, we need to calculate the percentage change in price. The copayment is increasing from $20 to $25, which is an increase of $5. We can calculate the percentage change in price as follows:
% Change in Price = (New Price - Old Price) / Old Price * 100
= ($25 - $20) / $20 * 100
= $5 / $20 * 100
= 25%
Now that we have the percentage change in price, we can calculate the forecasted change in the number of visits using the formula:
Change in Quantity Demanded = Price Elasticity of Demand * % Change in Price * Initial Quantity
The initial quantity is the average number of visits per patient, which is given as 2.5 visits.
Change in Quantity Demanded = -0.25 * 25% * (40,000 * 2.5)
= -0.25 * 0.25 * 100,000
= -6,250
The forecasted change in the number of visits is -6,250 visits. This means that with the increase in the copayment, the number of clinic visits is expected to decrease by 6,250 visits.