Assume that Corby Hospital Network assigns physical therapists with short-term contracts to three hospitals (A, B, and C) in different locations. The output of physical therapists is subject to diminishing returns as more are assigned to a given hospital. The therapists are paid a fixed monthly salary of $11,500. Based on past data, Corby estimates monthly net income/profit for each hospital, depending on the number of therapists assigned:

# Of TherapistsTotal net income/profit by hospital

($ thousands)

_________________________________________________________________________________________ _A____________B__________C______

0 000

1 151214

2 292327

3 423339

4 544250

5 655060

6 755769

7 836377

8 886583

a.What is the total number of therapists Corby will hire? (calculate MRP for each additional therapist at each hospital).

b.How will therapists be allocated between the three hospitals? What is the economic basis of these allocations?

c.In a real-world situation, would you expect the assumption used here of diminishing returns to a factor (that is, the therapists) to hold? Explain.

d.What would the corporation do if market wages of therapists rose to $12,000? How would Corby react if market wages fell to $10,000?

e.Would it make sense for the firm to concentrate on a single market area in order to saturate the area with therapists and capture al therapy revenue from competition in that area? Why might neighborhood hospitals differ with respect to the marginal productivity of therapists of similar ability?