Suppose your community has one dominant insurer that negotiates with a bunch of hospitals in your market (where "a bunch" is 10) The insurer is willing to trade-off in-network status for lower prices, thereby giving hospitals an incentive to lower price to get more customers. Suppose the resulting demand for orthopedic surgeries is given by
|
Price
|
50K
|
45K
|
40K
|
35K
|
30K
|
25K
|
20K
|
|
Quantity
|
0
|
10
|
20
|
30
|
40
|
50
|
60
|
Further suppose that the cost structure facing the hospitals follows the schedule below
|
Total Cost
|
200K
|
350K
|
550K
|
800K
|
1100K
|
1450K
|
1850K
|
|
Quantity
|
0
|
10
|
20
|
30
|
40
|
50
|
60
|
(hint #1: throughout this problem, whenever you calculate the marginal cost or revenue between two quantities, assume that the marginal value calculated applies at the higher of the two quantities and that the marginal value for one unit is the difference in total revenue or cost divided by 10, the change in quantity shown in the tables above).
(hint #2: the appropriate market diagram will help you determine how to answer the questions below)
Find the supply function for the hospitals
(hint #3: you have been given the total cost for all hospitals which we are assuming are identical, so the data above will get you the market supply curve)
(hint #4: the marginal cost shows the minimum a supplier must be paid to supply a given quantity of the good)
Given the existing market structure, find the equilibrium price and quantity of orthopedic surgeries.
Suppose the hospitals merge into one umbrella organization to improve their bargaining position. What would the new price and equilibrium be?
Under which scenario, (b) or (c), would society be better off? Explain your answer.