Question

Part C The long-run

Assume that the 4-A Clinic is at capacity with the workers you hired above. To expand further, some adjacent office space would need to be leased and new equipment would need to be added. The fixed costs associated with this are shown below. The patient-equivalents are total patients seen, not the increase in patient.

Patient- equivalents	Increased in fixed costs per day
50	$0
70	$2500
90	$4000
100	$6000

Other assumptions (so that wrong answer from 1-7 don’t effect your answers below):

The marginal cost (labor, operating costs, and consumables, but not the fixed costs) of seeing another patient-equivalent is $150.

The revenue from a patient-equivalent is fixed at $300.

Calculate the average incremental fixed cost per patient for

1. An increase from 50 to 70 patients
2. An increase from 70 to 90 patients
3. An increase from 90 to 100 patients
4. In expanding the clinic, which is most profitable?

1. Stay at 50 patients.
2. Expand to 70 patients
3. Expand to 90 patients
4. Expand to 100 patients.

Answer 1

The average incremental fixed cost per patient:

1. An increase from 50 to 70 patients:

average incremental fixed cost per patient= Increase in Fix cost/ Increase in no of patients

= $2500/20

=$125

2. An increase from 70 to 90 patients:

average incremental fixed cost per patient= Increase in Fix cost/ Increase in no of patients

= $1500/20

=$75

3. An increase from 90 to 100 patients:

average incremental fixed cost per patient= Increase in Fix cost/ Increase in no of patients

= $2000/10

=$200

In expanding the clinic, most profitable option would be:

When, the incremental revenue from a customer is higher than the incremental fix cost.

The incremental revenue per customer is = Fix revenue from a patient - marginal cost of seeing a patient

=$300 - $150

= $150

In expanding the Customer, the most profitable option will be when the incremental revenue from one patient (which is $150) is higher than the incremental fix cost. In this case Expanding the customer upto 90 is most profitable , as beyond 90 the fix cost per customer is $200, which is higher than the incremental revenue per customer $150.

Hence, Increase of patient from 70 to 90 is most beneficial to the Hospital.