# Price Elasticity of Demand

A clinic has incremental costs per case of \$10 and overhead costs of \$100,000. It faces a price elasticity of demand of −2. a. What is the clinic’s profit-maximizing price? b. How would the profit-maximizing price change if overhead costs

doubled? c. With excess capacity, would serving Medicaid customers for a fee

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of \$16 make sense? d. How would the profit-maximizing price change if Medicaid raised

its fee to \$18?

You manage a not-for-profit hospital in a competitive market. Suppose you decide to charge less than the profit-maximizing price to your customers. a. What effect would that decision have on profits? b. What effect would that decision have on you and your career?

Assume the price elasticity of demand for physicians’ services is −0.2. If your marginal cost per visit is \$20, what is your profit-maximizing

Admissions 6,552 9,048 9,672 9,984 10,296

Revenue \$52,416,000 \$70,574,400 \$73,507,200 \$73,881,600 \$74,131,200

Cost \$42,588,000 \$59,264,400 \$63,835,200 \$66,393,600 \$68,983,200

Price \$8,000 \$7,800 \$7,600 \$7,400 \$7,200

price if you control 5 percent of the market? What is your profit- maximizing price if you control 15 percent of the market? What lessons do you draw from this information?

A busy urgent care clinic has average costs of \$40 and incremental costs of \$60. a. How could incremental costs be higher than average costs? b. The clinic charges \$80 for a visit. What price elasticity of demand

does this information imply? c. Volume is currently 200 visits per week. What are the clinic’s

profits? d. An HMO guarantees at least ten patients per week. It proposes a

fee of \$55. Should the clinic accept the contract? e. What happens to profits if it accepts the contract?