Question

The government of Ivarrona has put in place an advanced telecommunications network that can support upload and download speeds of 1 gigabit (roughly 100 times faster than today’s average internet speeds). They are now ready to launch a Telemedicine service that will allow physicians to reach and treat (where possible) patients that cannot reach a doctor’s physical location or a hospital easily. They are ready to roll out a special package called ‘i-MediConnect’ consisting of a laptop, a high quality digital camera and a microphone system that can be plugged into any handheld device or laptop (it can run on Windows, MacOS, Linux, etc. and works on almost all major platforms). They plan to distribute this free to all physicians and clinicians (and to hospitals) that will participate in the program. They also plan to install these in thousands of special purpose kiosks built all over the country (Ivarrona). In addition to the i-MediConnect package, these Kiosks will also have devices that can capture many important elements of patient vitals – including blood pressure, A1C levels, body temperature, etc. (assume that it can do some body fluid capture and analysis too).

The total cost of manufacturing n Kiosks by the government is given by: 100 + 2√n

The total cost of setting up m Kiosks by the government is given by: 50 + (m/4)

Answer the following questions based on the information above. Sample Question 2 (a): Only one of the following alternatives is correct. Identify the correct alternative.

1. The manufacturing of these Telemedicine Kiosks is characterized by scale economies.
2. The average cost of manufacturing n units of the kiosk is increasing in n.
3. The total cost of manufacturing n units of the kiosk is decreasing in n.
4. The average cost of manufacturing n units of the kiosk is constant (neither increasing nor decreasing in n).

A third-party company offers to manufacture and set up, up to 10,000 Kiosks for a total fixed fee of 2750 (disregard currency units). Thereafter, for additional Kiosks it will charge a combined fee (of manufacture and set up). This fee for K kiosks is given by: F(k) = 150 + (k/2). The government expects that it will need 40,000 Kiosks in all. Should the government take the third-party company up on its offer?

Answer 1

i. The manufacturing of these Telemedicine kiosks is characterized by scale economies

The total cost of manufacturing n kiosks is 100+2√n

So the average cost of manufacturing n kiosks is 100/n+2/√n per unit which is decreasing as n increases

So the Total cost increases with increase in n however the average cost per unit decreases with increase in n which is a characteristic of economies of scale( Where Average Costs start falling as scale increases due to cost advantages)

The total cost if the Government produces and sets up its own kiosks is

Total Cost of manufacturing= 100+2√40000= 500

Total cost of setting up kiosks= 50+40,000/4= 10,050

So total cost for the government becomes= 10,550

Total cost for the Third party company

2750 For the first 10,000 kiosks

For the remaining 30,000 kiosks= 150+(30,000/2)= 150+15,000=15,150

So total cost for the third party company becomes 17,900 which is greater than 10,550 so the government should not take the third party company up on its offer