Humana hospitals in 1991 charged very high prices relative to their marginal costs. For example, Humana’s Suburban Hospital in Louisville charged patients $44.90 for a container of saline solution (salt water) that cost the hospital 81¢ (Douglas Frantz, “Congress Probes Hospital Costs—$9 Tylenols, $118 Heat Pads,” San Francisco Chronicle, October 18, 1991, A2). Calculate the hospital’s price/marginal cost ratio, its Lerner Index, and the demand elasticity, that it faces for saline solution (assuming that it maximizes its profit).
s. For saline solution, p/MC ≈ 55.4 and the Lerner index is (p − MC)/p ≈ 0.98. From Equation 11.9, we know that (p − MC)/p ≈ 0.98 = −1/ ε , - 1.02