Medical Care Production and costs
Assignments
1. Suppose you are to specify a short-run production function for dental services.
What inputs might you include in the production function? Which would be the variable
inputs and which the fixed inputs?
2. In your own words, explain the law of diminishing marginal productivity. Be sure to
mention the reason this law tends to hold in the short run.
3. Explain the difference between technical efficiency and economic efficiency.
4. Discuss the relation between the marginal and average productivity curves and the
marginal and average variable cost curves.
5. What does the elasticity of substitution illustrate? How is it expressed mathematically?
What two factors affect its magnitude?
6. Explain the difference between the explicit and implicit costs of production. Cite an
example of each.
7. What does economies of scope mean? Provide an example.
8. Explain the reasoning behind the U shape of the long-run average total cost curve. Why
might this cost curve shift upward?
9. Describe the two limitations associated with the cost theory provided in this chapter
when it is applied to explain the behavior of medical firms.
10. Suppose that you are interested in comparing the costs of producing inpatient services at
Saving Grace Hospital with those at ACME Hospital. Further suppose that the two
hospitals annually admit about 24,000 and 32,000 patients, respectively, at average
short-run total costs per admission of roughly $11,000 and $12,000.
A. Why may these average STC figures not represent the economic cost of providing
inpatient services at these two hospitals? Explain fully.
B. Using cost theory as presented in the text, identify and fully discuss four other factors
that might explain why ACME Hospital has higher average costs of production than
Saving Grace Hospital.
