Question

In: Economics

Assume that the 4-A Clinic is at capacity with the workers you hired above. To expand...

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 the total patients seen, not the increase in patients.

Patient-equivalents

Total fixed costs per day

50

$0

70

$2500

90

$6500

100

$12500
  • 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 equivalent for:

8. an increase from 50 to 70 patients.

9. an increase from 70 to 90 patients.

10. an increase from 90 to 100 patients.

11. In expanding the clinic, which is most profitable?

  1. Stay at 50 patients.
  2. Expand to 70 patients.

Solutions

Expert Solution

Ans:

Average incremental fixed cost = Change in total fixed cost / Change in number of patients

8) Average incremental fixed cost for an increase from 50 to 70 patients = ($2500 - 0) / (70 - 50)

                                                                                                                   = $2500 / 20

                                                                                                                    = $125

9) Average incremental fixed cost for an increase from 70 to 90 patients = ($6500 - $2500) / (90 - 70)

                                                                                                                   = $4000 / 20

                                                                                                                   = $200

10) Average incremental fixed cost for an increase from 90 to 100 patients = ($12500 - $6500) / (100 - 90)

                                                                                                                       = $6000 / 10

                                                                                                                       = $600

11) Option B

Expand to 70 patients

Explanation

Incremental profit = Incremental revenue - Incremental cost

                             = (20 * $300) - (($150 * 20) + $2500))   

                             = $6000 - ($3000 + $2500)

                             = $6000 - $5500

                             = $500

Since there is incremental profit, expand to 70 patients.

Rahul Sunny answered 5 months ago
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