Economics 157: Health Economics - Spring 2018 Midterm 1SolutionsProfessor HandelQuestion 1:Consider a situation where a population of consumers is deciding whether or not to buy astreet drug called Bearoin. A researcher observes these consumers’ purchases over two years, 1 and 2. Theprice of Bearoin changes from year 1 to year 2, as a result of a decreased number of sellers in the market,due to increased enforcement of the illegal drug market by authorities. The researcher observes the followingprices of the drug, and quantities sold, in year 1 and year 2:The year 1 price of the drug for consumers isP1= $60.The year 1 quantity consumed at that price isQ1= 900The year 2 price of the drug for consumers isP2= $150. The year 2 quantity consumed at that price isQ2= 6001. (5 points) Write down the formula for arc price elasticity of demand in terms ofP1,Q1,P2, andQ2.

Grading:1 or 2 points taken off for algebra mistake2. (10 points) What is the arc price elasticity of demand for Bearoin?

Grading:1 or 2 points taken off for algebra mistake3.(10 points) Assume that all things are as in the prior part of this problem, except that nowQ2isunknown. The researcher uses an outside data source that indicates the arc elasticity for consumers in thismarket is likely to be -0.25. If this is the elasticity, what value ofQ2should the researcher project?

Grading:wrong number: -84. (10 points) Go back to the original scenario described, withP1,Q1,P2, andQ2as described at thebeginning. Now, however, assume that 200 of the people who bought Beroin in period 1 were arrested, sowere unable to purchase Beroin in period 2. Assume that the true arc elasticity, i.e. the arc price elasticityyou would calculate if these consumers were still present, is half of the arc elasticity that is the solutionto the second part of this problem (the last sub-part of the first page). Given this, how many of the 200consumers who were arrested would have bought Beroin in period 2, at the new price of 150, if they had notbeen arrested?1

Grading:wrong number: -8