Presently, AFC has on its medical staff 10 doctors and 10 nurses. The daily wage
ID: 1188670 • Letter: P
Question
Presently, AFC has on its medical staff 10 doctors and 10 nurses. The daily wage of a doctor is $800, whereas a nurse is paid only $200 a day.
a. Write the equation for the medical isocost of AFC.
b. It has been estimated that an additional doctor could increase the daily output of the clinic by 30 patients, while an additional nurse would increase the number of patients served in a day by only 10. What is the marginal rate of substitution between doctors and nurses?
c. Is the mix of doctors and nurses the clinic is presently using optimal? Explain.
d. Suppose the clinic wishes to expand its operation. Would you recommend that the clinic increase the numbers of its nurses and doctors equally? Explain.
e. Now suppose as a result of an increase in the number of foreign doctors immigrating into the country the daily wage of doctors has dropped to $500. Should this change the hiring practices of the AFC? Explain.
Explanation / Answer
a.
Isocost line represents those combinations of two inputs that can be obtained at a same cost.
Fixed cost for AFC = Daily wage of Doctor*No. of Doctor + Daily wage of Nurse*No. of Nurse
Fixed cost = 800*10 + 200*10 = $10000
It means that Isocost equation will be:
10000 = 800*No. of Doctors + 200*No. of Nurses
Here, the change in no. of doctors and nurses will take place but fixed cost of $10000 will not change.
b.
Marginal output of doctor / Marginal output of Nurse = MRS between Doctor and Nurse = 30/10
Thus,
MRS between Doctor and Nurse = 3
c.
For optimal solution,
Wage of Doctor / Marginal output of doctor = Wage of Nurse / Marginal output of Nurse
Wage of Doctor / Marginal output of doctor = 800/30 = 26.67
Wage of Nurse / Marginal output of Nurse = 200/10 = 20
Hence,
Wage of Doctor / Marginal output of Doctor Wage of Nurse / Marginal output of Nurse
Thus,
It is not optimal solution.
d.
No. Company should not increase the number of doctors and nurse in equal manner because ratio of wage rate to marginal output of nurses and doctors are not equal. Thus, increase in equal numbers will drive the firm towards non optimal solution.