Question

Under the physician’s cooperative model, if the supply price of physicians were to rise, how would this affect the equilibrium staff size in the open-staff case? How would it affect the optimal staff size in the closed-staffed case?

Answer 1

In physician’s cooperative model, if physicians are able to limit the size of of staff so that there is a closed staff model, the supply of physician is already fixed at a certain level. Hence supply curve is perfectly inelastic. Revenue function is inverse U-shaped denoting average income of physician. For physicians who are on the staff, the optimal staff size is determined by the supply curve and average income curve.

In case of open staff model, phsyicians supply is not restricted and so they are free to enter if the average income is higher than their supply price. In this case,the revenue average for a physician is higher under closed staff model.

Now if the supply price of physicians were to rise (shifting the supply curve upwards), this would reduce the equilibrium staff size in the open-staff case but the optimal staff size in the closed-staffed case would not change because it is already fixed.