According to the California Nurses Association, Tenet Healthcare hospitals mark up drugs substantially. At Tenet’s Sierra Vista Regional Medical Center, drug prices are 1,840.80% of the hospital’s costs (Chuck Squatriglia and Tyche Hendricks, “Tenet Hiked Drug Prices, Study Finds More Than Double U.S. Average,” San Francisco Chronicle, November 24, 2002: A1, A10). Assuming Tenet is maximizing its profit, what is the elasticity of demand that Tenet believes it faces? What is its Lerner Index for drugs?
The Lerner index is (1840.8 − 100)/1840.8 = 0.95. Hence, Tenet believes that the elasticity it faces is −1.06.