Dr. Yuan opens a lab. The lab has an initial cost of $100,000. Expected net cash flow is $24,000 in the first year, growing by 15% per year. Net cash flow is revenue less expenses. Assume the lab has a 6 year life and there is no scrap value for the lab.
-Assume the partnership is formed and net cash flows are expected to grow at 10% each year. All else equal, what are the social welfare implications from the partnership, compared to the scenario of each doctor setting up their own lab?

Question

Quizplus · Accepted Answer

Economies of scale refer to the cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output generally decreasing with increasing scale. In the scenario where doctors form a partnership and share a lab, they are likely to experience lower costs per unit due to shared expenses and potentially more efficient use of resources. This can lead to lower prices for consumers or higher quality services, both of which can improve social welfare.

Dr Yuan Opens a Lab