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?
A)Quantity demanded rises by 35.0 percent.
B)Quantity demanded falls by 3.5 percent.
C)Quantity demanded falls by 1.5 percent.
D)Quantity demanded rises by 5.0 percent.
E)Quantity demanded stays the same.

Question

Quizplus · Accepted Answer

The cross-price elasticity of demand measures the responsiveness of demand for one good to a change in the price of another. In this case, the cross-price elasticity of demand between the services of Urban General and St.Elsewhere is +0.35. A decrease of 10% in the price of services at St.Elsewhere would lead to a decrease in demand for the services provided by Urban General by 0.15 x 10 x 0.35 = 0.525. This represents a 3.5% reduction in demand for Urban General's services.

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