Question

Sharpe Pharmaceuticals has developed a new drug called Zantor that can cure anxiety disorders. Sharpe Pharmaceuticals has a patent on the production of Zantor. Suppose the demand Zantor is given by the equation P=86-1/3000Q and the marginal revenue is given by the equation MR=86-1/1500Q. Further suppose that the marginal cost of producing Zantor is MC=6 and the average total cost is given by the formula: ATC=100,000/Q+6

Calculate the profit-maximizing price and quantity.

How much profit does Sharpe Pharmaceuticals earn?

One policy option to combat rising pharmaceutical prices is to have the government step in and regulate prices. Two options discussed in the lecture were to force P=ATC and to force P=MC. Why might this be a problem? You should discuss at least two possible problems.

Answer 1

ANSWER :

a. Marginal Revenue = 86 - 1/1500Q

Marginal Cost = 6

At profit maximization, MR = MC

or 86 - 1/1500Q = 6

or 1/1500Q = 80

or Q = 120000

From the demand curve, P = 86 - 1/3000Q

pr P = 86 - 1/3000 * 12000

or P =46

b) The maximum profir which the company could have earned

= ( P - MC ) * Q

= (46 - 6) * 120000

=48*105

c) The average total cost = 100000 * 120000 + 6 =1.2*1010

If the price of each tablet is put at 1.2*1010instead of the 46 that we derived earlier, it will be hugely beneficial to the company.

However, the demand in that case will be

1.2*1010= 86 - 1/3000 * Q

or Q = -3.59*1013. This is practically not possible.

So P cannot be forced to be equal to ATC

Again if P = MC, and MC = 6, then P = 6

The average demand in that case is

6 = 86 - 1/3000 Q

or 1/3000 Q = 80

or Q = 240000

The company will make zero economic profit in this case which is still better than negative economic profit.