Deck 12: The Market for Hospital Services

Question 1

You are a consultant and have been employed by a large inner-city hospital called City Hospital to estimate the demand for its services.Your research indicates that the income elasticity of demand for the target market is +0.50;the price elasticity of demand is -0.15;and the cross-price elasticity of demand with respect to the price of services at Rural Hospital,a near-by hospital,is +0.35.Answer the following questions.
If a hospital is experiencing economies of scale,

A)Its average cost curve is positively sloped as output increases
B)Its average cost curve is negatively sloped as output increases
C)It should reduce its output level to lower costs
D)Quality is falling as output is rising
E)Both b and c are true

Answer 1

B
Economies of scale says as you expand production,the average cost decreases.For example,if total cost = 100 + 5Q,then the average cost is + 100/Q + 5.Note: As Q increases,the average cost decreases.

Question 2

The main reason for the dramatic increase in the real cost of a hospital patient bed day over the past 50 years is

A)Increased price of medical equipment
B)Increased quantity of medical equipment
C)Increased wages and salaries
D)Increased use of labor

Answer 2

D
Hospitals are more labor-intensive now.

Question 3

Which of the following models of hospital ownership is most likely to over invest in hospital capacity?

A)For-profit hospital
B)Physician-controlled hospital
C)Utility-maximizing hospital

Answer 3

B
The physician-controlled market would like to maximize physician incomes.This would require that a hospital expand its investment in available services.Since physicians do not internalize the cost of these investments,they tend to over invest.

Question 4

Monopolistic competition differs from perfect competition primarily because:

A)In monopolistic competition,firms can differentiate their products
B)In perfect competition,firms can differentiate their products
C)In monopolistic competition,there are relatively few barriers to entry
D)In monopolistic competition,entry into the industry is blocked

Question 5

Which of the following is a strategy used by a firm in monopolistic competition?

A)Advertising
B)Lobbying
C)Improving hospital amenities
D)All of the above

Question 6

Explain how Certificates of Need (CON)may be anticompetitive.

Question 7

Robinson and Luft found that non-price competition among hospitals led to

A)Shorter hospital stays
B)More hospital services
C)More cost-containment
D)Less excess capacity

Question 8

The predominate organizational form for U.S.hospitals is not-for-profit.Why?

A)The profit motive corrupts human behavior
B)For-profit hospitals do not provide charity care
C)Private not-for-profit hospitals engage in most of the medical research
D)The not-for-profit form provides the most benefits to physicians
E)All of the above

Question 9

You are a consultant and have been employed by a large inner-city hospital called City Hospital to estimate the demand for its services.Your research indicates that the income elasticity of demand for the target market is +0.50;the price elasticity of demand is -0.15;and the cross-price elasticity of demand with respect to the price of services at Rural Hospital,a near-by hospital,is +0.35.Answer the following questions.
The price of services at Rural Hospital falls by 10%.What happens to the quantity of services demanded at City Hospital?

A)Quantity demanded rises by 35.0%
B)Quantity demanded falls by 3.5%
C)Quantity demanded falls by 1.5%
D)Quantity demanded rises by 5.0%
E)Quantity demanded stays the same

Question 10

If hospital transaction costs are high,then

A)A hospital is more likely to be vertically integrated
B)A hospital is more likely to use an integrated delivery systems
C)Both a and b
D)Neither a nor b

Question 11

The cost per patient day at Hospital A is much higher than the cost per patient day at Hospital B.This might be due to

A)Hospital A has sicker patients than Hospital B
B)Hospital A is an academic medical center and Hospital B is not
C)Hospital A has several long-term union labor contracts while Hospital B does not
D)Hospital B is more efficient than Hospital A
E)All of the above are possible

Question 12

You are a consultant and have been employed by a large inner-city hospital called City Hospital to estimate the demand for its services.Your research indicates that the income elasticity of demand for the target market is +0.50;the price elasticity of demand is -0.15;and the cross-price elasticity of demand with respect to the price of services at Rural Hospital,a near-by hospital,is +0.35.Answer the following questions.
The price of services at City Hospital falls by 10%.What happens to the quantity of services demanded by Rural Hospital?

A)Quantity demanded at City Hospital increases by 15.0%
B)Quantity demanded at City Hospital increases by 1.5%
C)Quantity demanded at Rural Hospital rises by 3.5%
D)Quantity demanded at Rural Hospital falls by 5.0%
E)Quantity demanded at City Hospital rises by 5.0%

Question 13

What are the determinants of a geographic market?

Question 14

Over the past 20 years,the ability of hospitals to cost-shift has

A)Increased
B)Decreased
C)Remained unchanged

Question 15

Explain why a hospital can be considered a multiproduct firm.

Question 16

The quality of hospitals used by HMOs is on average

A)Greater than non-HMO hospitals
B)Equal to non-HMO hospitals
C)Less than non-HMO hospitals

Question 17

What are the advantages of using the Herfindahl-Hirschman Index versus a concentration ratio?

Question 18

Over the last 25 years,the number of for-profit hospitals has

A)Exceeded the number of nonprofit hospitals
B)Has declined relative to nonprofit hospitals
C)Has increased by more than 50%
D)Has increased by less than 50%

Question 19

Studies have shown that nonprofit hospitals in the United States are ________ than for-profit hospitals.

A)Less efficient
B)More efficient
C)More efficient and higher quality
D)Not very different in efficiency

Question 20

Calculate the Herfindahl-Hirschman Index (HHI)for five hospitals in a market with the following market shares: 50%,25%,10%,10%,and 5%.Is this market more or less concentrated than a market with equal market shares and the same number of firms?