Question

Imagine two physicians who practice their profession in cities with identical demand for their services. Their marginal costs of providing medical services are also identical. During their medical school years, however, there was a difference between them. While Physician A received a full scholarship to attend medical school, Physician B had to pay full tuition. According to economic theory, should physician B charge a lower price than physician A for her services, the same price, or a higher price? Justify your answer.

Answer 1

The cost of schooling for physician B is more than the cost incurred by the other physician. If both the physicians were operating in the same city, then if the fees they charged were different, patients would go to the doctor who is charging less. In such a situation physician B should be charging similar to physician A.

Even if both of them were operating in different cities, they would most likely be operating in a market with other doctors and price cannot be set based on their individualistic expectations but based on the going market price. So it is not possible to charge more because his cost of education is more.