1) Your pharmacy provides services to Medicare and PPO patients. You estimate a price elasticity of demand of -2.2 for Medicare patients and -5.3 for PPO patients. Your marginal and average cost for dispensing a prescription is $2. What is the profit-maximizing dispensing fee for Medicare and PPO patients? Why might the price elasticities of demand differ?
2) Your dental clinic provides 3,000 exams for private pay patients and 1,000 exams for members of a union. Your fixed costs are $50,000 and your incremental cost is $40.
A. Private pay patients have a price elasticity of demand of -3. What do you charge them?
B. The union has negotiated a fee of $50. Is it profitable to treat members of the union?
C. What would happen to your profits if you stopped treating members of the union?
D. If the union negotiated a fee of $45 instead, what would you charge private pay patients?
E. What does this tell you about cost shifting versus price discrimination?