Question

The Arlington Visiting Caregiver Clinic has been coasting under the longtime management team, since about 1992. The clinic sells serves to homebound persons, including nurses’ aids, housekeepers, meal preparation and other similar services designed to assist the frail elders to stay in their homes. Performance is shown in the table. The clinic operates in a small city of 100,000 people, dominated by retail employment in small businesses that serve the surrounding rural communities. Two somewhat smaller providers serve the area, as well as two elder care community centers that offer some services for the homebound (meals on wheels, visiting social workers, etc.). Some undetermined number of solo providers is in the community as well. Families pay for almost all care directly, with little insurance. The new CEO has been thinking about the strategy going forward and has decided to be more aggressive in terms of pricing policy. The reason for this choice was simply that it seemed a direct way to increase profitability. He mentioned this in his golf club over the weekend to his friends who were in real estate, banking, and consulting. They seemed more cautious than he’d expected them to be—saying essentially that “going after price changes (higher prices---or even lower prices) was pretty risky unless you knew more about the steepness of the demand curve and how competitors would react”. • Therefore, he comes to you (his team of deputies) and charges you with figuring out whether increasing price would be better or not better for the clinic. You task is to help him reason correctly and get to the right choice. Specifically, you should: Describe the circumstances (or assumptions) by which revenue might increase with (a) a price increase or alternatively (b) with a price decrease. Note, you have to calculate the prices being charged from the data on total revenue (TR = P x Q). Elasticity of demand is %change in Q / % change in P. What would we be recommending to the CEO about trying to confirm the reasonableness of a price change at this time. You should use the most recent price change for calculations. • A bill is in the legislature that would, in the future, cause all firms like AVCC to be licensed by the department of health according to regulations. Should our committee be suggesting the CEO support this bill? Why? 2005 2010 2015 Visits/days 12000 14000 15000 Staff 47 53 60 Revenue 1.20M 1.47M 1.6M Expenses 1.1M 1.4M 1.55M Profit (% rev) 8.33% 4.76% 3.13%

Answer 1

A summary of the given information is below:

The demand curve for healthcare is upward sloping as shown below:

As has been mentioned that most recent price changes are to be used for calculations, I have calculated elasticity of demand for price change from 2010 to 2015.

= 4.277

Demand is positively related to price here and elasticity is positive. Now,

The above derivation shows that if Ed > 0, TR increases with a price increase and decreases with a price decrease, irrespective of demand being elastic or inelastic.

Thus, (a) TR increases in case of a price increase and (b) TR decreases in case of a price decrease.