The demand for beer for heavy drinkers is given by the following demand function: Qd=190-3P. The demand for beer for light drinkers is given by the following demand function Qd=60-4P. Suppose the current price for beer is, on average, $12 per case.
a. What is the price elasticity of demand for heavy drinkers?
b. How does this compare to the price elasticity of demand for light drinkers?
c. Are the differences in the price elasticity between the two groups what you expected? Why or why not?

Suppose you are doing a research project analyzing health care spending of individuals. You decide that health spending is a function of several variables: the age of the person, the person’s income, whether a person smokes, and whether the person is obese. You estimate the relationship between health spending and these variables using a multivariate regression. The dependent variable is the total amount spent on healthcare in a given year. Age and Income are continuous variables, while Smoker and Obese are dummy variables – taking the value of 1 if the person is a smoker or is obese, respectively. From your estimation, you obtain the following results:

VARIABLE (1) Age 50.33*** (3.45) Income -4.56*** (0.45) Smoker 515.35*** (30.42) Obese 624.22*** (33.44)
a. Interpret the coefficient for each variable.
b. Assuming that the average amount spent on healthcare was $12,000 and the average income was $59,000, calculate the income elasticity of health expenditures according to the results above. Interpret the elasticity. What type of good is healthcare?
c. This is a very simplified example and health spending is likely a function of several other variables. Suggest three other factors that should impact health spending that is not included above. What is the expected impact of your added variables?

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Beer Demand and Healthcare Spending Analysis Beer Demand a Price Elasticity of Demand for Heavy Drinkers Elasticity Change in Quantity Demanded Change ... View the full answer