Question

1.      Several years ago, the Partners HealthCare System of Boston, MA, conducted a cost-benefit analysis of instituting electronic medical records technology into all of their primary care practices. They computed total benefits and total costs to decide whether the project should proceed at that point. They considered benefits to the different providers in their practices, which consists of 3 physicians: Physician A, Physician B, and Physician C. Each of them has a marginal benefit of computerizing their patients’ medical records. Thus, think of “Quantity” in this market as the quantity of patient records that would be computerized by the physicians, which will depend on the price. Suppose the marginal benefit of digitizing patient records is given by:

MB=25-2Q for Physician A,

MB=20-3Q for Physician B,

MB=15-4Q for Physician C.

Please use this information to derive the “market” wide demand curve for medical record digitization for Partners Healthcare.

(Recall, MB=P in the Demand Curve, and you can re-write the Demand curve as Q=a function of P to help you with this step.)

Once you have derived the relevant market demand curve, please calculate the total benefit of providing digitization of medical records. (Hint—to know what total market Q would be, you can set P=0 and see what total quantity the market would want. Then, use that as the base of the triangle for which you would calculate the area; this would be the area under the market demand curve).

Next please calculate the total cost of this project. We’ll assume here that there are two vendors in the market, so we will need to add their supply curves to come up with the market supply curve. One vendor has MC=0.25Q and the other has MC=0.75Q. Please add up the supply curves to show the market supply curve. (hint—remember we first have to write Q=function of P (which is MC) to be able to add the supply curves, just as we did with the demand curves). Once you have done that, please add up the area under the market supply curve to show the total cost of this proposal. Please use the typical decision rule (adopt project if total benefit>total cost) to state whether the project will be adopted by the health care system.

Answer 1