Estimated the short-run total variable cost function for a sample of 55 for-profit hospitals in Texas (t-statistics are in parentheses below the estimated coefficients).

In STVC = 1.31 + 0.47 Ln q + 0.80 In w + 0.73 In QUALITY + 0.11In CASEMIX + 0.29 k + 0.07In DOC + Others factors

(0.69) (3.31) (4.42) (2.58) (1.48) (3.16) (0.88)

Adj. R Square = .95

N = 55

where STVC = short-run total variable cost, q = a measure of output (total inpatient days), w = average wage rate or price of labor, QUALITY = a measure of quality (number of accreditations), CASEMIX = an indicator of patient case-mix (number of services), k = a measure of capital (beds), and DOC = number of admitting physicians. All variables are expressed as natural logarithms (ln), so the estimated coefficients can be interpreted as elasticities.

A. How much of the variation in STVC is explained by the explanatory variables? How do you know that?

B. Which of the estimated coefficients are not statistically significant? Explain.

C. Does the estimated coefficient on output represent short-run economies or diseconomies of scale? Explain.

D. What are the expected signs of the coefficient estimates on w, QUALITY, and CASEMIX? Explain.

E. Provide an economic interpretation of the magnitude of the estimated coefficient on w.

F. What do the estimated coefficients on k and DOC suggest about the amount of capital and physicians at the representative hospital?