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Acton's Elasticity Estimates: Time Costs and Demand

See the attached file.

1. Assume the following for a 1 hour physician visit: On day 1, money cost of visit = $30 and quantity demand = 14; Time cost of a visit = $20; on day 2, money cost of a visit increases by $10 and quantity demand falls by 4 visits.

Explain the importance of time costs in the demand for medical services. What do you find for Ef and Em? What are the implications of these findings? What did Ep show empirically [from Acton (1975, 1976)]?

Ef =elasticity full price
Em =elasticity money price
p= acton's elasticity estimates (see included table)

Please explain in detail.

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Solution Preview

Acton was among the first to explore how time relates to demand for medical services. Elasticity of demand typically relates the quantity demanded to changes in price; but if we assign a monetary value to time, we can easily calculate the elasticity of the time cost of a visit. Clearly time is valuable to people, and most would rather be doing something other than spending time at a doctor's office. Acton pointed out that the opportunity cost of time becomes the deciding factor in the demand for medical services as health insurance becomes more common (Acton 1975).

In this problem you are asked to calculate elasticity in two ways: merely ...

Solution Summary

Acton's findings regarding time costs and demand for medical services are provided in the solution.