Joy Hospital Ltd.

Read the following fictional scenario and answer the questions shown below.

Joy Hospital Ltd. is the UK’s largest private healthcare provider, commanding 24% of the market share with the remaining 76% shared between 5 other companies.

 

An independent consumer report found that the UK private healthcare industry is ripe for collusion. The product is undifferentiated (identical), and the number of sellers is small. Pricing in the market is transparent, making it easy for a market leader to raise prices, and for other operators to take the hint and follow suit. The costs of telecommunication networks do not vary that much.  As a result, says the report, sellers’ pricing structures tend to run in parallel, at ‘high and rigid’ levels.

 

Question 1

  1. Define scarcity and opportunity cost. What role do these two concepts play in the making of management decisions for Joy Hospital Ltd.? (3 marks)

 

 

  1. Define the concept of equilibrium and illustrate, with the use of a diagram, the effect on price and quantity of an increase in demand for healthcare due to increase population growth.        (3 marks)

 

  1. Explain, with the use of a diagram, what will happen to the market equilibrium for Joy Hospital Ltd. if its cost of technology reduced and at the same time its customers faced an increase in their income. Be sure to clearly identify the new equilibrium price and quantity. (4 marks)

 

 

 

Question 2

  1. Joy Hospital Ltd.’s revenue for 2017 was £2.3 billion, up 85% over the previous year. Management attributes the increase in revenue to an increase in quantity demanded from 448000 to 796000 despite a 21% decrease in the price. Given this information:

 

  1. What is Joy Hospital Ltd.’s PED?         ( 3 marks)

                                                                                                                                   

  1. What factors will affect Joy Hospital Ltd.’s price elasticity of demand (PED)? (4 marks)

 

  • Is it surprising that Joy Hospital Ltd.’s revenue increased when it reduced its average price? Explain your answer. (2 marks)

 

  1. Explain the term externality and outline any externalities, negative or positive, which might be generated by Joy Hospital Ltd.                                                                                                               (5 marks)

 

  1. Explain the reasons why Joy Hospital Ltd. might want to grow. What are some of the risks involved with growth?                                                                                                                                                             (5 marks)

 

Question 3

  1. Define and illustrate with a diagram the concept of economies of scale. How does this relate to returns to scale? Briefly discuss the advantages of economies of scale for Joy Hospital Ltd.         (6 marks)

 

  1. With the use of specific examples for Joy Hospital Ltd., explain the terms fixed cost and variable cost.                                                             (3 marks)

 

  1. Explain three ways in which providers of Healthcare services can practise price discrimination in their markets. What criteria are relevant for price discrimination to be effective for Joy Hospital Ltd.?                    (5 marks)

                                                                                                            

 

Question 4

  1. Joy Hospital Ltd. is considering two possible projects but can only raise enough funds to proceed with one of them. Investment appraisal techniques have been used and the following results found:

 

  Project W Project X
Payback 3.8 years 2.8 years
Internal Rate of Return 14% 16%
Net present value 880000 610000

 

Explain, through an examination of each of the investment appraisal techniques above, which product would be the most preferable to Joy Hospital Ltd.                                                                                (5 marks)

 

  1. Explain the measures that governments can take to regulate the healthcare industry. How effective are the use of these regulations?                                                                                                (8 marks)

 

  1. Discuss the economic justifications for, and criticisms of, a merger. In particular how might these reasons apply to the companies mentioned in the case study above?          (4 marks)

 

Question 5

  1. What kind of market structure is Joy Hospital Ltd. operating within? Compare and contrast it with the three other market structures you have studied on the basis of price, output and profit. Be sure to include graphs in your discussion.                                                                  (20 marks)

 

  1. Explain four barriers to entry that might exist in the market in which Joy Hospital Ltd. operates? (5 marks)

 

  1. Joy Hospital Ltd. and one its competitors, Peace Hope, are locked in a price war trying to price each other out of the market. They can either maintain their current prices or offer discounts. Their payoffs are given in terms of profits. If both Joy Hospital Ltd. and Peace Hope decide to maintain their prices, Joy Hospital Ltd. will make profits of £80 million while Peace Hope will make profits of £50 million. If they both decide to discount their prices they will both make profits of £10 million. If Joy Hospital Ltd. maintains its price while Peace Hope offers a discount, Joy Hospital Ltd. will lose £10 million while Peace Hope will make profits of £70 million. Finally, if Joy Hospital Ltd. discounts its prices while Peace Hope maintains its prices, Joy Hospital Ltd. will make profits of £70 million while Peace Hope will lose £10 million.

 

  1. Present the information given above in a payoff matrix.                                                            (5 marks)

 

  1. Identify the dominant strategy for both Joy Hospital Ltd. and Peace Hope. What outcomes, if any, are Nash equilibria?                                                     (6 marks)

 

  • What is the cooperative outcome? (2 marks)

 

  1. Which firm benefits most from the cooperative outcome? (2 marks)

 

 (100 Marks Total)

Note DO NOT write back the case study or the questions in your answers; simply put the question number and the answer.

Assessment criteria Weight (%)
1.    Effectiveness of explanation of key microeconomic concepts and Accuracy of the calculations 100

 

There will be the opportunity to discuss your progress with the tasks during the workshop sessions during the course of the module. The portfolio should be submitted as a single document. There is no need for an overall introduction or an overall conclusion. You should include a cover sheet that includes the module code, the title of the module and your student number. A bibliography must be provided for each of the tasks. The electronic version of the portfolio must be submitted in MSWord format.

If you do not provide a copy by the deadline it will mean that you have failed to comply with the submission requirements and you will FAIL the assignment. Your feedback for the assignment will be provided face to face by booking an appointment after the grades have been released.

 

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