Question

Suppose you were to specify a short-run total cost function for a nursing home. Explain the variables you would include in the function. Which of these variables would be included in short-run fixed costs and which would be in short-run variable costs. Justify your selections.

Answer 1

Answer : Total cost = Fixed Cost + Variable Cost.

To justify the total cost of nursing home in short run I would like to include the following variables :

(i) Building maintainance expenditures ; (ii) salaries ; (iii) Equipments; (iv) Medicine supply;

Here, variable costs are medicine supply. Because medicine supply to a patient depends on patient's health condition. If patient's health needs more medicines to recover then medicine supply increase and on the other hand if patient's health needs less medicine then medicine supply decrease. Besides This medicine supply increase or decrease depends on the number of patients. This means medicine supply is a variable.

Fixed costs are maintenance expenditure like electricity bill, water supply bill etc. , salaries and required equipments. Because these costs are stable for a specific period and hence these costs cannot be changed in short time period.