Question

For questions 9-12, use the following scenario. You are a consultant and have been employed by Urban General, a large inner-city hospital, to estimate the demand for its services. Your research indicates that the income elasticity of demand for the target market is +0.50; the price elasticity of demand is -0.15; and the cross-price elasticity of demand with respect to the price of services at St. Elsewhere, a near-by hospital, is +0.35. Answer the following questions.
The price of services at St. Elsewhere falls by 10 percent. What happens to the quantity of services demanded at Urban General?
Quantity demanded rises by 35.0 percent.
Quantity demanded falls by 3.5 percent.
Quantity demanded falls by 1.5 percent.
Quantity demanded rises by 5.0 percent.
Quantity demanded stays the same.

Answer 1

Answer:

Quantity demanded falls by 3.5 percent.

Explanation:

Given that,

Income elasticity of demand = +0.50

Price elasticity of demand = -0.15

Cross-price elasticity of demand = +0.35

price of services at St. Elsewhere falls by 10 percent

Therefore,

Cross price elasticity of demand = Percentage change in quantity demanded ÷ Percentage change in price

+0.35 = Percentage change in quantity demanded ÷ (-10%)

0.35 × (-10%) = Percentage change in quantity demanded

(-3.5%) = Percentage change in quantity demanded

Hence, the  quantity demanded falls by 3.5%.