Question

Physicians have two types of patients: private patients who pay directly or with insurance, and Medicaid patients whose care is paid for by the state. Physicians must lower prices to attract more private patients, but they can add unlimited Medicaid patients at a constant price. The situation facing Dr. Casey is depicted in Figure 11-4. Units of medical service (say, number of patients x number of visits) are measured on the horizontal axis. How many units of medical service will Dr. Casey deliver to Medicaid patients?

a. AC

b. OD

c. OA

d. OC

Answer 1

Right answer is option D. Dr. will deliver OC units to medicaid patients.

Medicaid patients are having constant price which is shown by horizontal line parallel to X-axis. It is also the Marginal Revenue, Average Revenue and demand curve of medicaid patients like in perfect competition.

Dr will be in equilibrium where marginal cost equals the marginal revenue from medicaid patients. MC=MR is the condition for equilibrium.

MR is the price line of medicaid patients and MC is given.

Equilibrium unit of service is where both intersects and it is at quantity OC. To the right of OC marginal cost of patient is higher then marginal revenue and to the left MC is lower then MR.

Both equals at quantity OC. So Dr will deliver OC units of service to medicaid patients.