FGS_20_441_correction

FGS_20_441_correction - Step (2) $270,000 < $100...

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CHAPTER 20 Government Regulation: Principal Regulatory Mechanisms 441 Q 1 Q C 1 C 0 Q 0 P 0 P MR P * C * B A 0 AC = C * + AFC * Quantity Lump-sum transfer Incremental profit if C 1 < C * D M Price R FIGURE 20-1 The Impact of Yardstick Competition What is just the right amount of expense to incur in the effort to reduce production costs? Suppose the hospital discovers that it could reduce its marginal costs of produc- tion by $100 per case treated if it were to spend $150,000 on cost-reduction efforts. Suppose the hospital treats 5,000 cases per year. Would the cost-reduction effort be worth it? The example is shown in the first line of the following schedule. Marginal Cost of Marginal Revenue Efficiency Effort Generated Step (1) $150,000 < $100 × 5,000 = 500,000
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Unformatted text preview: Step (2) $270,000 &lt; $100 5,000 Step (3) $490,000 &lt; $100 5,000 Step (4) $750,000 &gt; $100 5,000 Step (1) represents the first of four possible steps in cost reduction. Each step will reduce costs per case by $100. With step (1), reducing per-unit costs by $100 costs a total of $150,000 in cost-efficiency efforts. The extra $1 saved for every case treated generates $500,000 in extra revenue. Clearly, this step of cost saving is worthwhile because it costs less ($150,000) than it saves ($500,000). By similar reasoning, one more step of cost saving also would be FOLLMC20_0132279428.QXD 5/31/06 7:36 PM Page 441 REVISED...
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