Figure 11-4

-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 * number of visits)are measured on the horizontal axis.How many units of medical service will Dr.Casey deliver?

Question

Figure 11-4
 
-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 * number of visits)are measured on the horizontal axis.How many units of medical service will Dr.Casey deliver?

Quizplus · Accepted Answer

Dr. Casey's decision of how many units of medical service to deliver will depend on the price he can charge for private patients and the fixed price he will receive for Medicaid patients. As shown in the graph, the demand curve for private patients (DD) slopes downwards, which means that Dr. Casey can attract more private patients by lowering his prices. On the other hand, the vertical line at the quantity of Medicaid patients (MM) represents the fixed number of visits he will receive at the constant Medicaid price.

The optimal level of service for Dr. Casey will be where the marginal cost (MC) curve intersects the demand curve for private patients (DD) and the vertical Medicaid line (MM). As shown in the graph, this occurs at point C, where the marginal cost is equal to both the private patient demand curve and the Medicaid price. Therefore, Dr. Casey will deliver OC units of medical service.

Figure 11-4 -Physicians Have Two Types of Patients: Private Patients Who Pay