If you don’t have information

timer Asked: Nov 10th, 2015

Question description

If you don’t have information you think you need, then assume it—but make your assumptions explicit.  Remember, I am solely interested in your economic thought process (i.e., the how’s and why’s of your answer).

Business: UAMS

Background: Under the UAMS brand name resides a College of Medicine, a College of Pharmacy, a College of Nursing, a College of Health Professions, and a College of Public Health.  Also, UAMS is home to an Eye Institute, Myeloma Institute, Psychiatric Research Institute, Institute on Aging, Cancer Institute, and a Spine and Neuroscience Institute. You can, if you want, go to UAMS for medical services, such as primary care, various surgeries, neonatal ICU, and women’s health. And more.

(1)Agency question: we’ve been talking about agents as individuals, but let’s go up a level or two. The UAMS Colleges are also agents for the principal (which is the UA System). Suppose you were Chancellor of UAMS. Suppose the UA System approved a 2% raise pool, and grants you the authority to allocate the 2% across the 5 UAMS Colleges. How do you decide which College gets more than 2% in additional salary, and which College gets less than 2% in additional salary? To simplify this further, you can consider just the College of Medicine (trains physicians) and College of Nursing (trains nurses). How do you determine which College deserves a bigger raise pool? Be sure to think explicitly about moral hazards.

(2)Horizontal Dimension question: Recently Arkansas State University received approval to open a medical school to train osteopathic physicians. The graduates of the program (DO’s), have the same basic training as MD’s—so for the sake of the question, we will call them equals. Arkansas State said the new medical school is necessary because Arkansas ranks 49th in the country for physicians per capita—which implies that the demand for more “doctor” education exists, and we will assume Arkansas State is correct. So assuming UAMS has competent leadership, the only explanation for why UAMS did not expand its Medical School to meet the unmet demand must be on the cost-side.  What cost-side factors should UAMS consider before expanding its Medical School? Would these cost-side factors tend to yield economies of scale, or diseconomies of scale? (You can assume that medical school education is just like an MBA, but with more live hands-on applications. Or, if you’d rather, you could answer the same question but for all the different nursing schools in Little Rock—why not just have one? Or, if you prefer, answer the same question about the MBA program—what does cost-side factors say about the best size of the UALR MBA program?)

(3)Vertical Dimension question: UAMS has its own physicians, but also outsources a lot of physician services—like surgery—to outside suppliers. Typically the services occur within facilities operated by UAMS, but the physicians themselves are fundamentally independent contractors. So why would UAMS do this? Why use a mix of “within-the-firm” employees and “outside-the-firm” independent contractors for physician services? Be sure the words agency, scale and transaction costs appear in your answers.

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