Question

Answer the following:

1. It costs a health center $4,000 to produce 20 visits and $4,500 to produce 30 visits. The cost per additional visit is

Select one:

A. $30.

B. $50.

C. $150.

D. $200.

2. It is important to distinguish between average and incremental cost

Select one:

A. because managers need incremental cost data to make decisions about contracts.

B. because average and incremental cost are often quite different.

C. because most management decisions are incremental.

D. All of the above

3. An increase in efficiency will reduce average cost.

Select one:

A. True

B. False

4. Most of the time, the opportunity cost of an input will be what you pay for it.

Select one:

A. True

B. False

5. A practice has fixed costs of $100,000. Its variable costs will be $200,000 for 1,000 patient visits and $300,000 for 1,500 patient visits. This suggests that

Select one:

A. incremental costs are constant.

B. average costs decline with higher volumes.

C. the practice can realize economies of scale.

D. all of the above.

Answer 1

1. It costs a health center $4,000 to produce 20 visits and $4,500 to produce 30 visits. The cost per additional visit is given by (4500 - 4000)/(30 - 20) = 500/10 = $50. Option B

2. It is important to distinguish between average and incremental cost because the all of the above are true. Incremental cost is marginal cost and marginal analysis is required to maximize profits. Option D

3. An increase in efficiency will reduce average cost. Option A. Because a move towards efficiency (minimum AC) implies a rise in output and reduction in AC (to the left of minimum AC) as well as a fall in output and reduction in AC (to the right of AC).

4. Most of the time, the opportunity cost of an input will be what you pay for it. True.

5. A practice has fixed costs of $100,000. Its variable costs will be $200,000 for 1,000 patient visits and $300,000 for 1,500 patient visits. This suggests that TC = 100,000 + (300,000 - 200,000)/(1500 - 1000)Q = 100,000 + 200Q. Now ATC is falling as ATC is 100,000/Q + 200. MC is constant and so Option D is true.