A clinic finds that by eliminating appointments it can reduce costs. The clinic

Question

A clinic finds that by eliminating appointments it can reduce costs. The clinic is able to eliminate some telephone staff, and physicians become more productive. Patients wait until the physician is available, so there is virtually no down time. Does this analysis adopt a societal view of costs? Why might this analysis result in a bad managerial decision?

Treating a patient with congestive heart failure with tPlex rather than Isother increases average life expectancy to 12.3 years from 11.5 years. The added cost of therapy is $14,000. What is the cost per life year?

What does it mean to have market power? Are firms with market power extremely profitable?

Why might banning advertising drive up prices?

Explanation / Answer

It does not adopt a societal view of costs because it does not take into account the opportunity cost of the time people spend waiting to see a physician. It might result in a bad managerial decision because people will tire of the long waits and go elsewhere.

14,000/(12.3-11.5)= 17,500.

Market power means the the firms face a downward sloping demand curve and thus are able to influence the price of goods by their decisions on how much to produce. A firm with market power may or may not be exteremely profitable depending on its cost structure.

Banning advertising might discourage competition because consumers no longer had access to information about the relative prices of goods and are unable to make good choices.

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