Question

2) Use ONE GRAPH to compare the optimal price and quantity of medical care a hospital would charge/produce if it were a profit maximizing hospital, a quantity maximizing hospital, and a revenue maximizing hospital. Assume demand for hospital services and costs of providing care are the same across the models.

Answer 1

For profit maximisation, we have the familiar condition of MR=MC. That is, a quantity more than what this condition warrants, leads to a condition of MR<MC, and so lower profits. To the left of MR=MC, we get MR>MC, so there is a possibility of increasing profits by increasing quantity.

For Sales/quantity maximisation, a firm can produce the good as long as it does not incur any losses. This condition of no-loss-no-profit can be determined at AR=AC.

For revenue maximisation, a firm can increase revenue by increasing quantity as long as MR is positive. So, the condition is MR=0.

The corresponding quantities and prices (price can be obtained at the given conditions by finding the corresponding price on the AR/Demand schedule).

MC AC PR ARE D MR

Profit max => (Qp, Pp)

Sales max => (Qs, Ps)

Revenue Max => (Qr, Pr)