ECONOMICS 3332 Resource Economics, Winter 2013
Dalhousie University Assignment #2
Professor M.L. Cross Date due: Wednesday, March 27.
Each of the questions in this assignment is weighted equally. This assignment, like much of
what we have done in ECON 3332, employs the equimarginal principle.
The economic theory of the mine characterizes an optimum pattern for extracting an exhaustible
resource over time. Some resources, such as energy, cannot be recycled. Others, such as copper or
iron, can be recycled. Petroleum provides both types of resources. When petroleum is used as fuel,
it cannot be recycled. But plastic is manufactured from petroleum and plastic can be recycled. With
this in mind consider questions in Part I. (Tientenberg, Chapter 8, discusses recyclable resources.)
Part I
1. Suppose a limited stock of an exhaustible resource is available. Is it technically possible for
recycling to completely eliminate the constraint imposed by an exhaustible stock? Why or why
not?
2. Suppose that the total available amount of a nonrenewable resource is 1000 tons. The
resource can be recycled 95 percent of the resource can be recovered for the next round of use
each time the resource is recycled. In addition, suppose that recycling can continue into the
infinite future. What effect does recycling have on the total amount of the resource that is
available? Show your calculations.
3. Now suppose a firm is manufacturing plastic garbage cans. The firm can make garbage cans
from either recycled plastic or new plastic manufactured directly from petroleum or any
combination of the two – the two types are perfect substitutes. However, new plastic and old
plastic have different requirements for storage, transportation, and sorting. Therefore, the
marginal cost (MC) of garbage cans made from new plastic is:
MC1 = 2q1
The marginal cost of garbage cans made from recycled plastic is:
MC2 = 40 + 0.4q2.
The quantity of garbage cans made from new plastic is represented by q1, and q2 represents
garbage cans made from recycled plastic. The market for garbage cans is perfectly competitive.
Price is determined by the following inverse market demand function for garbage cans:
P = 40 – (q1 + q2).
How many garbage cans will be produced from new plastic and how many will be manufactured
from recycled plastic? Show your calculations and briefly explain your results. (Hint: Assume
that all garbage cans are made from new plastic. Will the marginal cost of cans made from new
plastic exceed the marginal cost of cans made from recycled plastic when the market is in
perfectly competitive equilibrium?)
4. Now, suppose the inverse demand function for garbage cans is P = 80 – 0.5(q1 + q2). Marginal
cost remains as defined in in problem (3). How many garbage cans will be manufactured from
new plastic? How many will be made from recycled plastic? Show your calculations and
explain your results. (Hint: When the market is in perfectly competitive equilibrium and the
firm is maximizing profits, it must be the case that P = MC1 = MC2. Why?)
Part II
Questions in Part II provide a simple example about the pricing of electricity. The example does
not include issues such as fluctuations in demand during a 24 hour cycle or during a seasonal
cycle, whether electrical utilities are nature monopolies, etc.
Let P represent the price of electricity in cents/kWh and Q represent the quantity of electricity in
millions of kWh/day. Suppose that the inverse demand function for electricity is
P = 12 – 0.5Q.
Assume that up to 3 million kWh/day can be generated by gas turbines at a marginal cost of 5
cents, up to 6 million kWh/day can be generated by coal fired generators at a marginal cost of 4
cents, and up to 8 million kWh/day can be generated by a hydroelectric dam at a marginal cost of
2 cents. No other sources of electricity are available.
5. Graph the marginal cost curve and the demand curve. Graphs must be labeled accurately in
order to obtain full credit.
6. What is the economically efficient price and quantity of electricity? Explain.
7. What is the economically efficient quantity of electricity to produce from each of the three
sources? Explain.
8. Now suppose the paper company announces that if it can obtain 2kWh/day of electricity at a
price of 2 cents/kWh, it can open a paper plant which will provide more jobs. The company
argues that the available generating capacity can provide more electricity than current users are
demanding. Further, according to the company, it is appropriate to provide the company with
electricity at 2 cents/kWh because that is the marginal cost of producing hydroelectricity from
the lowest cost source. Is it economically efficient to sell electricity to the paper company at a
price of 2 cents/kWh? Explain briefly.
SMH Introduction
Sakasegawa Memorial Hospital (SMH) is a 650-bed metropolitan not-for-profit (NFP) hospital in a major city. The hospital competes with other hospitals for its patient base. Managed care is a significant part of its revenue stream and the hospital is not receiving competitive rates. This puts the hospital at a competitive disadvantage. The hospital has been in existence for over 75 years and there is only a small mortgage on the building. This is an advantage for the hospital. The hospital sold property and used the funds to build the infrastructure of the organization. While the hospital needs additional funding for major projects, it has no more property available for sale. In addition, while the hospital has enjoyed the benefits of several significant contributors, these contributors are getting "contributor fatigue." They are less interested in contributing because the hospital has not turned the corner on operation revenue and expenses. The hospital faces significant issues with the current economic crisis. The issues include a drop in Medicaid payments and a number of people in the community losing their insurance coverage. |
2007 revenue expense data
Revenue | Source | Amount | ||||
Net Patient revenue non-Medicare | $260,183,000.00 | ] | ||||
Capitation Revenue | $36,829,320.00 | |||||
Patient Revenue - Medicare Medicaid | $188,408,800.00 | three items match line 1 Part 1 | ||||
Unrelated business revenue | ||||||
Capitation Rev | ||||||
Other rev - sale of asset | $5,492,700.00 | |||||
Rent revenue | $450,000.00 | |||||
dividends | $3,800,000.00 | |||||
Investment Income | $1,892,925.00 | |||||
Other rev - other | $5,290,000.00 | Note - see detail | ||||
Contributions | $7,722,580.00 | |||||
Net assets released from restrictions | ||||||
Ttl Unrestricted Rev | $510,069,325.00 | |||||
Expenses | Source | Total | Clinical Services | management & General | Fundraising | |
Salaries | ||||||
Salaries Officers | 25a Part II | $5,008,242.00 | $540,392.00 | $4,135,300.00 | $332,550.00 | |
Other Salaries | 26 Part II | $176,481,232.00 | $158,833,127.00 | $16,765,700.00 | $882,405.00 | |
Pension | 27 Part II | $17,942,172.00 | $16,147,964.00 | $1,704,508.00 | $89,700.00 | |
Fringe Benefits | 28 Part II | $23,783,424.00 | $21,406,424.00 | $2,259,000.00 | $118,000.00 | |
Payroll Taxes | 29 Part II | $13,336,000.00 | $12,002,000.00 | $1,266,000.00 | $68,000.00 | |
Total Salaries & Benefits | total | $236,551,070.00 | $208,929,907.00 | $26,130,508.00 | $1,490,655.00 | |
Fundraising fees | 30 Part II | $0.00 | ||||
Accounting Fees | 31 Part II | $340,900.00 | $340,900.00 | |||
Legal fees | 32 Part II | $1,345,300.00 | $1,211,300.00 | $134,000.00 | ||
Supplies & Other | 33 Part II | $226,106,126.00 | $225,600,500.00 rwmayer: rwmayer: See detail - Hospital costs | $500,210.00 | $5,416.00 | |
Telephone | 34 Part II | $1,049,247.00 | $944,400.00 | $99,600.00 | $5,247.00 | |
Postage and shipping | 35 part II | $339,584.00 | $305,626.00 | $32,260.00 | $1,698.00 | |
Occupancy | 36 Part II | $0.00 | ||||
Equipment rental and maintenance | 37 Part II | $8,967,852.00 | $8,071,152.00 | $896,700.00 | ||
Printing and publications | 38 Part II | $177,000.00 | $159,200.00 | $16,800.00 | $1,000.00 | |
Conference conventions and meetings | 40 Part II | $78,500.00 | $70,000.00 | $8,000.00 | $500.00 | |
Interest exp (net) | 41 Part II | $9,601,800.00 | $8,551,800.00 | $1,000,000.00 | $50,000.00 | |
Depreciation | 42 Part II | $31,083,552.00 | $27,975,052.00 | $3,108,500.00 | ||
Provision for Bad debt | 43a * | $1,005,000.00 | $1,005,000.00 | |||
Other expenses | 43b-* | |||||
Ttl exp | $516,645,931.00 | $482,823,937.00 | $32,267,478.00 | $1,554,516.00 | ||
Excess of rev over exp | ($6,576,606.00) | |||||
2007 asset liab data
Beginning of year | End of Year | ||||
ASSETS | Source | 2005 | 2006 | ||
Cash | line 45 Part IV | $6,787,000.00 | $2,210,000.00 | ||
Cash investments | line 46 Part IV | $19,850,000.00 | $32,808,000.00 | ||
Accounts Receivable | Line 47a Part IV | $117,500,000.00 | |||
Less Allowance | Line 47b Part IV | $47,948,000.00 | |||
Net Accounts Receivable | Line 47 Part IV | $63,330,160.00 | $69,552,000.00 | ||
Pledges Receivable | Line 48a Part IV | $4,700,900.00 | |||
Less Allowance | Line 48b Part IV | $576,000.00 | |||
Net Pledges Receivable | Line 48 Part IV | $6,123,000.00 | $4,124,900.00 | ||
Other Note receivables | Line 451cPart IV | $13,378,061.00 | $22,606,100.00 | ||
Inventory | Line 52 Part IV | $8,443,379.00 | $10,362,000.00 | ||
Prepaid expenses | line 53 Part IV | $9,917,000.00 | $7,705,000.00 | ||
Investments (FMV) | line 54a Part IV | $74,180,000.00 | $78,800,000.00 | ||
Land | line 57a Part IV | $617,314,000.00 | |||
Accoumulated Depreciation | line 57b Part IV | $328,568,000.00 | |||
Net Land | line 57c Part IV | $290,824,900.00 | $288,746,000.00 | ||
Other Assets | line 58 Part IV | $81,000,000.00 | $74,500,000.00 | ||
Total Assets | $573,833,500.00 | $591,414,000.00 | |||
Liabilities | |||||
Accounts Payable | line 60 Part IV | $83,829,885.00 | $87,118,742.00 | ||
Tax exempt bond | line64a part IV | $139,233,400.00 | $136,451,800.00 | ||
Mortgage and Note Payable | line 64b Part IV | $17,210,000.00 | $17,900,000.00 | ||
Other Liabilities | line 65 Part IV | $122,683,500.00 | $133,556,958.00 | ||
Total Liabilbites | $362,956,785.00 | $375,027,500.00 | |||
Fund Balances | |||||
Unrestricted | line 67 Part IV | $155,132,000.00 | $158,866,000.00 | ||
Temporarily restricted | line 68 Part IV | $38,523,000.00 | $40,208,000.00 | ||
Permanently restricted | line 69 Part IV | $17,221,715.00 | $17,312,500.00 | ||
Fund balance | $210,876,715.00 | $216,386,500.00 | |||
Liabilities and Net Assets | $573,833,500.00 | $591,414,000.00 |
Detailed revenue
Part III Form 990 | ||||||
Patient days | Inpatient | 164,972 | ||||
Ambulatory service visits | outpatient | 148,617 | ||||
Patient days distribution | % distribution | total days | ||||
Cardiology | 6% | 9,145 | ||||
Orthopedic | 10% | 15,959 | ||||
Medicine | 72% | 119,246 | ||||
Other services | 13% | 20,622 | ||||
distribution of patient days | Medicare | Medicaid | Managed care/Insurance | Private pay | Column1 | total |
Cardiology | 3658 | 457 | 4481 | 549 | 9145 | |
Orthopedic | 5905 | 160 | 9097 | 798 | 15959 | |
Medicine | 41736 | 9540 | 66778 | 1192 | 119246 | |
Other services | 9223 | 496 | 10401 | 502 | 20622 | |
60522 | 10653 | 90756 | 3041 | 164972 | ||
% distribution Roger Mayer: Roger Mayer: use this allocation basis to allocate expenses between payers in Module 3 assignment 2. | 37% | 6% | 55% | 2% | 100% | |
Revenue Distribution | ||||||
Payer | Column2 | Total Revenue | Inpatient Revenue | Outpatient Revenue | ||
Medicare Revenue | $179,567,920.00 | $154,045,694.40 | $25,522,225.60 | |||
Medicaid Revenue | $16,840,880.00 | $14,956,792.00 | $1,884,088.00 | |||
Managed Care | $274,162,320.00 | $226,729,856.00 | $47,432,464.00 | |||
Private Pay | $14,850,000.00 | $12,177,000.00 | $2,673,000.00 | |||
$485,421,120.00 | $407,909,342.40 | $77,511,777.60 | ||||
Inpatient Revenue Distribution | ||||||
Cardiology | Orthopedic | Medicine | Other | Totals | ||
Inpatient Revenue | $39,612,365.72 | $41,460,795.08 | $284,847,513.80 | $41,988,667.80 | $407,909,342.40 |
Detailed costs
Table I | |||||
Personnel and other | totals | Inpatient allocated expenses | Allocation basis | ||
Officers Salaries& Fringe | $708,424.15 | $566,739.32 | patient days | ||
Clinical Salaries & Fringes | $208,221,482.85 | $197,810,408.70 | hours of service | 41.6779152919 | |
Other clinical expenses | $20,318,478 | $16,254,782 | patient days | ||
Depreciation | $27,975,052 | $22,380,042 | square feet | ||
Physician Fees | $14,850,673.89 | $11,880,539.11 | patient days | ||
Other supplies | $9,433,511.95 | $7,546,809.56 | patient days | ||
Utilities | $17,289,172.12 | $13,831,337.69 | square feet | ||
Total Personnel and other | $298,796,794.96 | $270,270,658.39 | |||
Table II | |||||
Direct Patient Care Expenses | totals | Inpatient allocated expenses | Allocation basis | ||
Cardiology | $12,506,205.80 | $10,004,964.64 | 100% to cardiology | ||
Orthopedic | $12,339,125.41 | $9,871,300.33 | 100% to Orthopedic | ||
pharmaceuticals | $23,391,254.11 | $18,713,003.29 | Patient days | $69,545,157.89 | |
Ancillary (lab x-ray) | $63,540,193.25 | $50,832,154.60 | Patient days | ||
Total | $111,776,778.57 | $89,421,422.85 | |||
Table III | |||||
Indirect Patient Care expenses | Totals | Inpatient Allocated expenses | Allocation basis | ||
Cardiology medical supplies | $2,659,459.72 | $2,127,567.78 | 100% to cardiology | ||
Orthopedic medical supplies | $2,393,513.75 | $1,914,811.00 | 100% to Orthopedic | ||
pharmaceuticals | $5,318,919.44 | $4,255,135.55 | Patient days | $31,913,516.65 | |
general medical supplies | $21,275,677.77 | $17,020,542.21 | Patient days | ||
ancillary expenses | $13,297,298.60 | $10,637,838.88 | Patient days | ||
Total | $44,944,869.28 | $35,955,895.43 | |||
Table IV | |||||
Malpractice | Totals | Inpatient Allocated Expenses | Allocation basis | ||
Cardiology | $5,263,709.72 | $4,210,967.78 | 100% to cardiology | ||
Orthopedic | $6,908,619.01 | $5,526,895.21 | 100% to Orthopedic | ||
Medicine | $14,804,183.60 | $11,843,346.88 | 100% medicine | ||
Other services | $328,981.86 | $263,185.49 | Patient days | ||
Total | $27,305,494.19 | $21,844,395.35 | |||
Table V | |||||
Clinical Salaries & Fringes - Inpatient Allocation | total | ||||
Cardiology | 324,648 | ||||
Orthopedic | 478,770 | ||||
Medicine | 3,458,134 | ||||
Other services | 484,617 | ||||
4,746,169 | |||||
average rate per hour - $41.68 | |||||
Table VI | |||||
Square feet allocation - Inpatient services | |||||
Cardiology | 21% | ||||
Orthopedic | 26% | ||||
Medicine | 49% | ||||
Other services | 4% | ||||
total | 100% |
Module 3 Asgn 1 Instructions
The SMH financial statement contains additional data that will allow you to conduct an analysis of revenue efficiency factors. | |||||
In this assignment, you will calculate direct expenses including labor, supply, and drug costs. | |||||
Assignment detail | |||||
Tabs to reference: | |||||
"Detailed Revenue" allocates revenue by inpatient and outpatient | |||||
"Detailed Expenses" allocated direct expenses by inpatient and outpatient | |||||
"2007 Revenue Expense Data" provides data on other income sources and indirect expenses. | |||||
1 | Create a table that shows gross profit (patient revenue - direct expenses) for inpatient and outpatient services. | ||||
See example: | |||||
Inpatient Revenue | Outpatient Revenue | Total Revenue | |||
Inpatient direct expenses | Outpatient direct expenses | Total Expenses | |||
IP Gross Profit | OP Gross Profit | Total Gross Profit | |||
2 | Calculate Gross Profit (GP) margin for both services. | ||||
3 | Calculate GP per patient day and per operating theater (OT) procedure. | ||||
4 | Compare your expenses to your benchmark data. (Because some of the comparative data does | ||||
not have sufficient detail this may be a high-level review.) | |||||
5 | Comment on the services from the perspective of expense and revenue distribution and explain why | ||||
there are differences between gross profit margins | |||||
6 | Complete a table that includes other expenses and other revenue. The table should clearly | ||||
distinguish between direct and indirect expenses | |||||
7 | Comment on why other income and contributions are critical to the survival of the organization. | ||||
Does the reliance on investment income mean that the organization will take a higher risk in order | |||||
to increase income? |
Module 3 Assgn 2 Instructions
You will use the information from M3: Assignment 1, develop a gross profit analysis for managed care payers | ||||||||||
to develop a strategic plan for a managed care contract negotiation. | ||||||||||
Assignment detail | ||||||||||
Tabs to reference: | ||||||||||
"Detailed Revenue" allocates revenue by inpatient and outpatient | ||||||||||
"Detailed Expenses" allocated direct expenses by inpatient and outpatient | ||||||||||
1 | Calculate inpatient gross profit for the major payers at the hospital. | gross profit (patient revenue-direct expenses) | ||||||||
Inpatient analysis | ||||||||||
Medicare Revenue | Medicaid Revenue | Managed Care | Private Pay | Totals | ||||||
Patient Revenue Roger Mayer: Roger Mayer: use revenue distribution table | $154,045,694.40 | $14,956,792.00 | $226,729,856.00 | $12,177,000.00 | $407,909,342.40 | |||||
Expenses Roger Mayer: Roger Mayer: Allocate expenses based upon patient day distribution %. |
||||||||||
Personnel and other | $270,270,658.39 | |||||||||
Direct Patient Care Expenses | $89,421,422.85 | |||||||||
Indirect Patient Care expenses | $35,955,895.43 | |||||||||
Malpractice | $21,844,395.35 | |||||||||
Total Direct Expenses | $417,492,372.03 | |||||||||
Total Gross Profit | ||||||||||
Gross profit percentage by Payer | 100% | |||||||||
2 | Calculate gross profit and gross profit percentage by payer. | |||||||||
3 | Comment on the results of your GP calculations. | |||||||||
4 | In this example we assumed that patients from each payer incurred costs at the same rate. | |||||||||
Is this assumption correct? What level of detail of cost identification should the Hospital attempt to obtain? | ||||||||||
5 | Based on your understanding of your costs, you will develop a plan for contract negotiations with a managed care provider. In your plan, | |||||||||
outline a strategy for contract negotiation. | ||||||||||
6 | Based upon your analysis of the other organizations are you in a better or worse position when it comes for contract negotiations? | |||||||||
7 | Payers always want to move procedures from the Inpatient setting to an Outpatient setting. | |||||||||
How does this affect the hospital strategy? |
Module 4 Assgn 1 Instructions
You will analyze the SMH Data Set to identify costs associated with specific clinical product lines and measure gross profit. | ||||||||||
You will compare results your analysis and become familiar with activity based costing and managed care contracting in this study. | ||||||||||
The "Detailed Cost" tab provides inpatient costs and the allocation basis for each cost. You will put this information into a model | ||||||||||
and a model that analyzes costs by product line. In this case we have for product lines including Cardiology, Orthopedic Medicine, and Other. | ||||||||||
Assignment detail | ||||||||||
Tabs to reference: | ||||||||||
"Detailed Revenue" allocates revenue by inpatient and outpatient | ||||||||||
"Detailed Expenses" allocated direct expenses by inpatient and outpatient | ||||||||||
1 | Calculate inpatient gross profit for each product line. The template that students can use is as follows: | |||||||||
Note: Allocate revenue based upon patient day distribution between product lines | ||||||||||
Cardiology | Orthopedic | Medicine | Other | Totals | ||||||
Inpatient Revenue | ||||||||||
Expenses | ||||||||||
Officers Salaries& Fringe | ||||||||||
Clinical Salaries & Fringes | ||||||||||
Other clinical expenses | ||||||||||
Depreciation | ||||||||||
Physician Fees | ||||||||||
Other supplies | ||||||||||
Utilities | ||||||||||
Direct Patient Care Expenses | ||||||||||
Indirect Patient Care expenses | ||||||||||
Malpractice | ||||||||||
Total Direct Expenses | ||||||||||
Gross profit by Product Line | ||||||||||
2 | Comment on the results of your inpatient GP calculations. What product line is most profitable by dollar amounts and gross profit percentage? | |||||||||
3 | Is there value in separating product lines into more detail? What detail would you recommend? | |||||||||
For example, what is the value in separating revenue and expenses by physician? Surgery type? And others? |
Module 4 Assgn 2 Instructions
In this assignment, students will carry out a profit analysis for a specific product line. | ||||
We are using the example of Cardiology. However, students can use another product line | ||||
Students will develop a Cost-Volume-Profit template to help measure costs and changes to variable and indirect costs using SMH data. | ||||
Assignment detail | ||||
Tabs to reference: | ||||
"Detailed Revenue" allocates revenue by inpatient and outpatient | ||||
"Detailed Expenses" allocated direct expenses by inpatient and outpatient | ||||
"Module 4 Assgn 1 Instructions" for baseline cost information | ||||
1 | Develop a template of costs. | |||
You should separate expenses between variable and fixed expenses. | ||||
To assist, the template provides some guidance: | ||||
Inpatient Cardiology | Cardiology total | Patient days | Per patient day | |
Revenue | ||||
Expenses | ||||
Variable | ||||
Clinical Salaries & Fringes | ||||
Other clinical expenses | ||||
Physician Fees | ||||
Other supplies | ||||
Direct Patient Care Expenses | ||||
Indirect Patient Care expenses | ||||
Total Variable Expenses | ||||
Fixed | ||||
Officers Salaries& Fringe | ||||
Roger Mayer: Roger Mayer: do not calculate fixed costs on a per patient day basis. | Depreciation | |||
Utilities | ||||
Malpractice | ||||
Total Fixed Expenses | ||||
Total Direct Expenses | ||||
Gross profit for Inpatient Cardiology | ||||
2 | Calculate the break even point in patient days | |||
Note: Break even point | ||||
Total Fixed cost / (per patient day revenue - per patient day variable expenses) | ||||
3 | Calculate the break even point assuming a 5 percent increase in clinical salaries and a 4 percent increase in officer salaries. | |||
4 | A physician wants to add a new procedure that will increase direct patient care expense by $200 per day. | |||
What is the impact on gross profit and the breakeven point? | ||||
5 | The hospital is considering hiring a physician. This will increase annual costs by $250,000. However, with the addition of this | |||
physician it is anticipated that patient days will increase by 6 percent. Is this a good move for the Hospital? | ||||
6 | Many times it is difficult to determine if a cost is variable or fixed. In addition, costs may be variable, but only in a relevant range. | |||
Do you agree with the categorization of costs as they are presented on this template? Would you recommend changes? What additional | ||||
information would help you analyze the data? | ||||

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