By Ricardo A. Bitran
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Figure 3-5. Labor Costs Modeled as Step-Fixed Costs Total monthly labor costs of the health center are computed by calculating the sum of labor costs across the five health care services and the four types of medical personnel: Although labor is treated as a fixed cost in the above specification, it could easily be converted into a variable cost by eliminating the integer function from the above formula. In such a case, the number of minutes of each category of employee would continually be adjusted up or down with demand.
Dor, Gertler, and van der Gaag (1987) have used a similar specification for the quantity of visits demanded in their study of demand in Côte d'lvoire. These authors first model the decision to enter the market by the people with a health problem. Then, conditional on seeking care, they model the choice of provider. Finally, among those choosing a particular provider, they estimate a linear demand equation for the quantity of visits. 3. This is indirect utility. Page 16 where Pj = consumer's out-of-pocket price at provider j's facility Yr = household income of people living in population ring r Drj = weighted average distance between the people in population ring r and provider j b0j = constant that captures the effect on consumer utility of all the variables affecting utility other than price, income, and distance (quality perceptions, for example, are imbedded in this coefficient) b1 = coefficient associated with the variable price (b1 < 0) b2 = coefficient associated with the product of the variables price and income (b2 > 0) b3 = coefficient associated with the variable travel distance (b3 < 0).
The next section is a discussion of possible pricing strategies for the focus health facility; it is followed by a discussion about strategies for and feasibility of breaking-even. The next section comments on the size of the facility's loss, if any, and external subsidization; we then briefly discuss the model's comparative statics. Pricing How much should the focus health facility charge for its services? A well-known tenet of welfare economics is that to maximize welfare in a perfectly competitive market selling private goods and with well-informed consumers, price should be equal to marginal cost.