Question

Suppose there are two hospitals in town, Adam Hospital and Brown Hospital. Both hospitals face similar demand and cost function. Thus, using the terminology of the Newhouse model, both hospitals have a similar production possibility curve. However, utility functions differ between these two hospitals. Adam hospital focuses on increasing access to health care in the community and hence places a higher value on providing a high quantity of hospital care. By contrast, the boss of Brown hospital focuses on increasing the quality of health care in the community and hence places a higher value on adopting the new medical technology.

(a) Show graphically how these two hospitals make choices of optimal quantity and quality (given their different objective functions and thus, different indifference curves). Which hospital is more likely to become a large hospital in terms of number of beds? Explain your answer.

Answer:

Answer 1

Adams hospital is likely to become large hospital in terms of no. of beds because his focus is on the quantity of healthcare services and thus will use his resources in such a way that results in providing greater number of healthcare quantity and hence greater quantity of beds.

And to draw the IC's first we need to assume some well behaved utility functions like Cobb Douglas with two variables in focus,

one quantity of healthcare and other the technology improvement or quality of healthcare.

For obvious reason we will assign higher weight to quantity of health care in Adam's utility function and lower weight to technology or quality if health care. Where as in Browns Hospital utility function we will assign higher weight to technology or quality of healthcare and lower weight to quantity of healthcare.