Marginal Revenue

You provide therapeutic massage services, focusing on stress reduction services that are not covered by insurance. Your monthly overhead is $2,000. You value your time at $20 per half hour (how long a therapeutic massage takes). Supplies per massage cost $4. You currently charge $75 per massage and have a volume of 100 clients per month. Your trade journal says that a 5 percent reduction in prices typically results in a 7.5 percent increase in volume. What would happen to your volume, revenues, and profits if you cut your price to $70? If you raised your price to $80?

The table shows case-mix-adjusted price and volume data for Dunes Hospital. Calculate its marginal cost, marginal revenue, and profits at each level of output. What price should it choose?

Your firm spent $100 million developing a new drug. It has now been approved for sale, and each pill costs $1 to manufacture. Your market research suggests that the price elasticity of demand in the general public is −1.1. a. What price do you charge the public? b. What would happen to profits if you charged twice as much? c. What role does the $100 million in development costs play in your pricing decision? d. The Medicaid agency has made a take-it-or-leave-it offer of $2 per pill. Do you accept? Why or why not?

Why are most healthcare providers able to charge different groups of purchasers different prices for the same products?