The University Eye Institute in upper New-York state is a state-of-the-art ophthalmology center that specializes in a sophisticated laser surgery to correct myopia. Current annual volume is 1000 operations. A major customer of the center is the United Health Insurance system. United currently sends the University Eye Institute 200 patients per year or 20% of the total.

United pays $2,500 per operation as does every payor. The United Health Insurance Company is satisfied with the quality and service provided by the University Eye Institute and has proposed that they send the Center an additional 100 patients (operations) per year. United proposes that the fee be reduced to $2,000 for the additional 100 patients and for the prior 200 patients. Assume the fee paid by payors other than United Health remains the same.

a) What is the marginal revenue per patient if the proposal is accepted?

b) What is the marginal cost per patient if the proposal is accepted? Here are some cost data to help you answer part b.

Volume 1000 per year 1100 per year

Average Total Cost $2,125 $2,100

c) Would you recommend that the proposal be accepted or not? Why?