a. The average total cost is given for the inpatient services. The economic cost of a decision depends on both the cost of the alternative chosen and the benefit that the best alternative would have provided if chosen. The given ATC does not take into consideration the cost of the alternative, i.e. where else these costs could have been incurred instead of inpatient services example, for outpatient services. The given cost can represent the accounting cost but not the opportunity cost. Thus, the costs stated represent half of the economic costs. b. The graphical representation of the average total cost curve is shown belowThe graph above illustrates that the total average cost ATC for both the hospitals is the same. However, the total cost of the two hospitals varies. The reason is evident. The cost is directly proportional to the number of patients. As ACME hospital deals with 8000 more patients than Saving grace hospital, the cost of ACME produces at a higher cost.c. The reasons for the higher average cost of production for ACME hospital are:- There might be higher variable costs for ACME Hospital. Inpatient services differ from patient to patient as per the requirement to overcome the given disease. This is higher will lead to a higher average total cost.- There may be declining productivity that implies higher per unit cost. This is so because the average cost is inversely proportional to the productivity- There may be higher average fixed costs, again may vary according to the output.
The factor of diminishing returns is reflected in rising average cost.
d. The sole basis of the comparison is to compare for profits. It is to see how much is the difference between revenues and costs for each hospital. Once, the assumption is removed, the comparative analysis will get muddled. There may be a possibility that the two hospitals operate on same fixed costs or the cost of charging patients may be the same. There will be no variable costs and only fixed costs will exist. Once that, the number of units (number of patients) will be a direct indicator of the profit and there will thus be no need for