Question

Consider a Doctor in hebron, his opponunity cost of staying in his clinic is 50 per hour. The clinic weekly rent is 3OO and electrity and other costs is 10/hour. Normally the doctor stay 4 hours in his clinic per day:

a, What is the marginal cost of staying for one more hour?

b. If the Doctor expect 3 patients in the fifth hour and he charge 25/patient , is it sensible 10 stay open for the extra hour? Explain your answer

Answer 1

a. The marginal cost of staying for one extra hour in the clinic will be total marginal cost for that one extra hour. The total marginal cost is the sum of the oppurtunity cost of staying one extra hour and the electricity & other charges for the one extra hour. The rental is not part of the marginal cost for one extra hour because the rental is weekly and regardless of how many hours the doctor stays in the clinic, he will have to pay the same rent.

So the marginal cost = 50 (the oppurtunity cost) + 10 (electricity and other costs) = 60.

b. If Doctor sees 3 patients in the fifth hour, then total marginal revenue recieved in the fifth hour will equal total revenue recieved from the 3 patients = 25*3 = 75. While marginal cost of the extra hour is 60. So profit earned from spending one extra hour = MR-MC = 75-60 = 15.

Hence the doctor can earn a profit of 15 if he opens for the extra hour. So it is perfectly sensible to stay the extra hour. Only if MR<MC, then only it would not be sensible to stay for the extra hour.