Question

Please Answer part A & B. The item we are working on is a new medication.

Part I: Maximizing profits - the "Science": Your firm is a profit-maximizing monopolist - you are a small startup, this is your first product and you must determine pricing and decide whether to stay open in the short run. A. What price will you charge and what quantity will you produce in your first launch market? Price: Quantity: B. Should you stay open or shut down in the short run? C. Consider an opportunity to expand to another market. What would you need to take into consideration before deciding whether to sell in that market? Expand from just focusing on Peanuts paste allergy but to focusing on The Big-8 (Milk, Eggs, Fish, crustacean shellfish, Tree Nuts, Peanuts, Wheat, Soy). We would consider the number of people dealing with a certain food allergy, and how serious these allergies are. The market demand model: Q = 30 + B1 Price + B2 Price of competing drug + B3 Per capita Income (in $10,000) + B4 Prevalence + The coefficients were estimated as follows for this market: BO -50, B1 --2, B2 = 1.005, B3 =100, B4 =1000 The average selling price of the competing drug is currently $100, per capita income is $35,000, and the prevalence rate (how common the disease is) is 0.3. Total Cost of production = 2,600,000+ 0.25Q Where 2,600,000 represents the R&D costs invested to date and 0.25 are the variable costs of manufacturing each unit. Since this course does not have a calculus prerequisite: Marginal Revenue 1=400.25-Q1, Marginal Cost = 0.25 ***Note: Students who wish to provide a calculus derivation of the answer may do so ***Students who haven' taken first year economics should use the economics help room and / or learn from teammates

Answer 1

Solution-

We are given marginal revenue and marginal cost.

Profit maximizing or optimal condition for a monopolist is where the marginal revenue earned from one unit of output is equal to marginal cost incurred in producing one unit of Output.

Optimal condition MR = MC JMR = 400.25-81 (Giren) Also, MC = 0.25 Equating mR and Mc, we get 400.25-Q, = 0.25 7 8, = 400.25 -0.25 18, * = 400 |

- MR = 400. 25 - Q TR = SMR dd = $1400-25-8. ) do, TR= 400-250,- og &o, ARE TR - 900-95 - B1 - Price) So, p*= 400-25-81 t _ 400-25-400 = $200.25

B) Any firm would shut down when its price is less than average variable cost.

Total cost = 2,600,000 +0.250 Total variable cost = 0.250 Average variable Cost = Tv.C -0.254 e I TAVc = 0.25 Price = $200.25 oop > Ave, So monopolist should open - the firm .