Utility, production functions..Does the hospital operate efficiently?…

  1. Consider a Newhouse-Feldstein nonprofit hospital that maximizes U(Q,q) where Q=quantity and q=quality. Does the hospital operate efficiently?
  • For a correct answer, you will need to define efficiency and either state or derive the conditions for efficiency. Then determine whether the hospital is efficient.
  • You can assume the inverse demand function is P=P(Q) and the hospital has a zero-profit constraint.
  • You will need to add a production function to the model. The joint production function is F(Q,q,K,L)=0 where K=capital equipment and L=labor. The hospital hires capital and labor in competitive markets at unit prices of r and w, respectively.
  1. “Transactions cost’ and endowment effects’ are both explanations for why consumer demand may respond discontinuously to price(people keep making the same choices when the price of a good changes). In the context of the demand for Medicare Advantage health plans, can you think of a way empirically to distinguish between two explanations for discontinuous demand?

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