ECONOMICS_3332_Resource_Economics_Winter_2013Dalhousie_University

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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