A competing model of health care costs to the model given in the previous exercise is the
Question:
A competing model of health care costs to the model given in the previous exercise is the uniform price elasticity model. Using the definition of elasticity of demand from Section 6.3, this model assumes
where k is a constant.
(a) Solve the equation in part (a). What happens as p approaches 0?
(b) To avoid the problem encountered in part (a), the model can be modified as
where P is a constant representing other medical expenses not covered by insurance, such as over-the-counter medications. Solve this equation with the initial condition q(0) = 1, writing the solution in terms of k, P, and p.
(c) Using the estimates q(1) = 1/2 and P = 0.10, write the solution from part (b) in terms of p.
(d) Use the answer to part (c) to estimate the portion of q(0) that consumers will use if they pay 20% of the cost of their health care.
Step by Step Answer:
a As p approaches 0 q becomes inf...View the full answer
