The services of a certified psychologist cost $110 per hour, and an extended health plan covers 50 percent of that cost. Under the plan, the clients covered used 625 hours of this service in a typical three-month period. To save money, the extended health plan reduced its coverage to 40 percent of the cost. As a result, the clients covered decrease their use of this service to 482 hours in a typical three-month period.
a. Determine the total cost of giving this insured service to the plan before and after the change in coverage.
b. Based on the data above, calculate the elasticity of demand for the services of a certified psychologist. Interpret the elasticity of demand, and explain the behaviour of the clients covered based upon this interpretation.