Economics of managerial decision making

Read the following fictional scenario and answer the questions shown below.

Joy Hospital Ltd. is the UK’s largest private healthcare provider, commanding 24% of the market share with the remaining 76% shared between 5 other companies.

An independent consumer report found that the UK private healthcare industry is ripe for collusion. The product is undifferentiated (identical), and the number of sellers is small. Pricing in the market is transparent, making it easy for a market leader to raise prices, and for other operators to take the hint and follow suit. The costs of telecommunication networks do not vary that much.  As a result, says the report, sellers’ pricing structures tend to run in parallel, at ‘high and rigid’ levels.

Question 1

1. Define scarcity and opportunity cost. What role do these two concepts play in the making of management decisions for Joy Hospital Ltd.? (3 marks)

1. Define the concept of equilibrium and illustrate, with the use of a diagram, the effect on price and quantity of an increase in demand for healthcare due to increase population growth.        (3 marks)

1. Explain, with the use of a diagram, what will happen to the market equilibrium for Joy Hospital Ltd. if its cost of technology reduced and at the same time its customers faced an increase in their income. Be sure to clearly identify the new equilibrium price and quantity. (4 marks)

Question 2

2. Joy Hospital Ltd.’s revenue for 2017 was £2.3 billion, up 85% over the previous year. Management attributes the increase in revenue to an increase in quantity demanded from 448000 to 796000 despite a 21% decrease in the price. Given this information:

1. What is Joy Hospital Ltd.’s PED? ( 3 marks)

1. What factors will affect Joy Hospital Ltd.’s price elasticity of demand (PED)? (4 marks)

• Is it surprising that Joy Hospital Ltd.’s revenue increased when it reduced its average price? Explain your answer. (2 marks)

1. Explain the term externality and outline any externalities, negative or positive, which might be generated by Joy Hospital Ltd.                                                                                                            (5 marks)

1. Explain the reasons why Joy Hospital Ltd. might want to grow. What are some of the risks involved with growth?                                                                                                                                                             (5 marks)

Question 3

1. Define and illustrate with a diagram the concept of economies of scale. How does this relate to returns to scale? Briefly discuss the advantages of economies of scale for Joy Hospital Ltd.         (6 marks)

1. With the use of specific examples for Joy Hospital Ltd., explain the terms fixed cost and variable cost.                                                                                                                                                                     (3 marks)

1. Explain three ways in which providers of Healthcare services can practise price discrimination in their markets. What criteria are relevant for price discrimination to be effective for Joy Hospital Ltd.?                    (5 marks)

Question 4

1. Joy Hospital Ltd. is considering two possible projects but can only raise enough funds to proceed with one of them. Investment appraisal techniques have been used and the following results found:

Explain, through an examination of each of the investment appraisal techniques above, which product would be the most preferable to Joy Hospital Ltd.                                                                                (5 marks)

1. Explain the measures that governments can take to regulate the healthcare industry. How effective are the use of these regulations?                                                                                                (8 marks)

1. Discuss the economic justifications for, and criticisms of, a merger. In particular how might these reasons apply to the companies mentioned in the case study above?          (4 marks)