Look at the hospital cost data on slide 14 of the “Cost Functions” slides. To interpret this data: the values are indices, where 1.00 is the average cost for hospitals with 10,000 discharges. For example, the average cost of communications for hospitals with 5000 discharges is listed as 1.22. This means that the average cost of communications with hospitals with 5000 discharges is 122% of the average cost of communications for hospitals with 10,000 discharges (i.e. 22% higher). The final row (“all cost centers” gives the average total cost for the given number of discharges (relative to hospitals with 10,000 discharges).

a) What (approximately) is the minimum efficient scale for hospitals, according to this data? Explain. (You can consider very small differences to be effectively zero when answering this question, and there are at least two answers that could be considered correct).

b) In the range between 2,500 discharges and 10,000 discharges do hospitals exhibit economies or diseconomies of scale, according to this data?

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Table 3 Average cost per discharge 15,000 discharges discharges discharges discharges dischares Cost center 2500 SO00 7500 10,000 20,000 discharges (100 beds) (136 beds) (200 beds) (270 beds) (310 beds) (440 beds) Hospital administration 1.64 Public relations General accounting 1.24 1.08 1.0 093 0.90 1.12 0.98 1.24 1.22 0.97 1.0 1.07 0.90 1.03 168 1.08 1.0 0.91 Communications 1.64 1.07 1.0 0.94 0.94 Purchasing Patient accounts Data processing Credit and collecom Medical records Printing and duplication 1.04 Perwonnel Cafeteria Laundry Housekeeping to +01- 1.04 1.24 10 +24 1.08 1.01 1.0 1.0 1.02 0.92 0.93 1.0 1.10 1.21 1,06 to Tos 1.32 1.10 1.03 1.0 0.97 0.96 0.97 1.02 LO1 LO 0.98 1.32 1.06 LO 1.0 1.02 1.06 1.48 1.20 1.12 1.07 10 0.93 0.90 1.32 1.40 1.03 1.0 0.97 0.96 1.14 1.04 1.0 0.96 0.89 All cost centers 1.36 1.10 1.03 1.0 0.99 0.99 Table 3 Average cost per discharge 15,000 discharges discharges discharges discharges dischares Cost center 2500 SO00 7500 10,000 20,000 discharges (100 beds) (136 beds) (200 beds) (270 beds) (310 beds) (440 beds) Hospital administration 1.64 Public relations General accounting 1.24 1.08 1.0 093 0.90 1.12 0.98 1.24 1.22 0.97 1.0 1.07 0.90 1.03 168 1.08 1.0 0.91 Communications 1.64 1.07 1.0 0.94 0.94 Purchasing Patient accounts Data processing Credit and collecom Medical records Printing and duplication 1.04 Perwonnel Cafeteria Laundry Housekeeping to +01- 1.04 1.24 10 +24 1.08 1.01 1.0 1.0 1.02 0.92 0.93 1.0 1.10 1.21 1,06 to Tos 1.32 1.10 1.03 1.0 0.97 0.96 0.97 1.02 LO1 LO 0.98 1.32 1.06 LO 1.0 1.02 1.06 1.48 1.20 1.12 1.07 10 0.93 0.90 1.32 1.40 1.03 1.0 0.97 0.96 1.14 1.04 1.0 0.96 0.89 All cost centers 1.36 1.10 1.03 1.0 0.99 0.99

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