Question

6. Define fixed and variable costs and give examples.

7. How would you explain total costs, average costs and marginal costs?

8. What are the differences between tax -exempt healthcare organizations and Individual investor -owned healthcare organizations?

9. Explain what the diagnosis-related group payment system for Medicare.

10. Explain three different payment methods to pay providers.What are they ? How do they work?

Answer 1

6. Fixed Costs: Fixed costs are the costs or expenses that remain same regardless of how many units of a good are produced. Such costs do not change with the change in the level of output. Fixed costs remains the same whether the output is zero or at the maximum level. For example: Cost of plant and machinery, insurance, banking & legal fees, salary, rent, property taxes, etc.

Variable costs: Variable costs are the costs or expenses that changes with the change in the level of production. They proportionally fluctuate with the level of output. Variable costs are zero when the level of output is zero. For example: cost of raw material, labor cost, utility costs, delivery costs, etc.

We can illustrate the difference between fixed and variable costs with the help of the following example:

Level of Output	Fixed costs	Variable Costs
0	20	0
1	20	10
2	20	15
3	20	20
4	20	25
5	20	30

We can see from the above table that fixed costs remains same irrespective of the change in the level of output whereas variable costs changes with the change in level of output.