Question

Suppose a firm, Coronotech, owns the patent needed to produce a vaccine that prevents the contraction of Covid-19, and thus is the only firm that can produce and sell this vaccine. Given that this is a huge scientific/medical breakthrough, the vaccine only needs to be received once and there are no close substitutes for this vaccine.

a.Use an Edgeworth box to represent this simple allocation economy. Make sure to locate the initial endowment and label it E. Measure goods for Bob from the lower left corner. Measure Krabby Patty burgers on the vertical sides and Jellyfish on the horizontal sides of the box. (Draw this carefully enough and large enough so that you can clearly add your answers for part (c) of this problem).

1. Now let’s examine Coronotech’s situation more precisely. The total cost function of the firm is given by C(Q) = 32000 + 6Q, with Q measured in millions. Market inverse demand is given by P=6350-4Q. Find formulas for the MR curve, MC curve, and AC curve.
2. e) Solve for the profit maximizing Q and P, and monopoly profit. Sketch the AC curve, MC curve, MR curve, and demand curve, labeling the profit maximizing quantity of vaccines and the monopoly price per vaccine. In no more than two sentences indicate how these cost curves differ from what you drew in part (a) and why they are reasonable for a vaccine product.
3. f) Suppose that due to political pressure, the government decides to regulate the price, requiring Coronotech to charge the efficient price. What would be the price, quantity, and the profits for Coronotech, in this case? Is this a sustainable policy (would the firm stay in the business of making the vaccine)?
4. g) If the government wants Coronotech to charge the lowest price that allows it to stay in business, what price should the government require? You do not need to calculate this price, just explain how the government would find this price. Would the quantity that corresponds to this price be higher, lower, or the same as the efficient quantity found in part (f)?

Answer 1

D) marginal revenue is the Increase in revenue by selling additional unit of good. It is derivative of total revenue with respect to Q.

TR=6350q-4Q2

MR=6350-8Q

MC=6

AC=32,000/Q +6

E) Monopoly equilibrium at ,MR=MC{ Profit Maximizing condition}

6350-8Q=6

Q=6344/8=793

P=6350-4*793=3178

F) Efficent price is, at which total economic surplus is Maximizing and it is Equal to perfect competition equilibrium price.

Perfect competition equilibrium at P=MC

6350-4Q=6

Q=6344/4=1596

P=6350-4*1596=6

Profit=(P-AC)*Q

AC=32,000/1596 +6=26.05

Profit=(6-26.05)*1596=-32000

Because firm is earning loss ,so they will leave the market and this will result in complete loss of economic surplus and benefit of vaccine.

G)A firm stay in business when they atleast earn normal Profit or zero economic profit.

To make them stay in business , goverment need to allow them to charge price ,where price and average cost is equal, which lead to firm making Normal Profit.

The quantity associated with this price will be lower than efficent Equilibrium quantity because this price will higher than efficent price and higher price lead to decrease in quantity demanded and thus quantity sold will be lower.