The consultants of Allcare Family Clinic (AFC) have determined that if the clini

Question

The consultants of Allcare Family Clinic (AFC) have determined that if the clinic hires two more practical nurses, without any other changes in its operation, it can increase the number of patients it treats during a week from 200 to 230. The weekly salary of a practical nurse is $1500.

a. What is the weekly marginal product of a practical nurse?

b. Assuming nurses are the only variable input, what is the (short-run) marginal cost of AFC?

c. If, on average, the clinic receives $120 for each patient it treats, should AFC hire more nurses? Explain.

d. Again assuming that on average the clinic receives $120 for each pateint it treats, what would be the maximum weekly salary AFC would be willing to pay to each of the two additional nurse?

Explanation / Answer

(a) Marginal product of 1 nurse = Increase in patients / Increase in nurses

= (230 - 200) / 2 = 30 / 2

= 15

(b) Marginal cost = Change in total cost / Change in number of Nurses hired

= $1,500 x 2 / 2

= $1,500

(c) Incremental revenue from hiring 2 nurses = Increase in patients x Charge from each patient

= 30 x $120 = $3600

Incremental cost = Salary per nurse x number of nurses hired = $1500 x 2 = $3000

Since incremental revenue > Incremental cost, AFC should hired the nurses.

(d) The maximum salary AFC should be willing to pay is the incremental revenue it gets, that is, $3600 for 2 nurses.

So each nurse's maximum salary = $3600 / 2 = $1800

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