Question

In 2003, Johnson & Johnson (J&J) introduced the first drug-eluting stent (DES), a medical device inserted into blocked arteries (in a process called coronary angioplasty) to restore blood flow. The drug-eluting stent made previous stents and other methods of restoring blood flow obsolete, as it solved the problem of secondary blood clots and blockages that plagued previous methods. Suppose the demand for DESs is Q = 9 – (P/2) where Q is the number of DESs demanded per year (in thousands) and P is the price of a DES in thousands of dollars.

(a) Suppose it cost J&J $6 thousand to produce each DES. If J&J were the only producer of DESs (e.g., because entry is prevented by J&J’s patents), what price should J&J charge for its DES to maximize profit? How many DESs would be sold at that price? (Make sure your answers are in the correct units.)

(b) In 2004, Boston Scientific figured out a way to engineer around J&J’s DES patents and introduced its own DES. However, Boston Scientific’s technology was more costly than J&J’s. It cost Boston Scientific $10 thousand to produce each DES. If physicians and patients consider the DESs of J&J and Boston Scientific identical and J&J and Boston Scientific compete by simultaneously choosing how much to produce (where the combined DES production determines the price), how many DESs will J&J produce in equilibrium? How many DESs will Boston Scientific produce? What is the equilibrium price in this case? (Again, make sure your answers are in the correct units.)

Answer 1

The equilibrium price is the market price where the quantity of goods supplied is equal to the quantity of goods demanded. This is the point at which the demand and supply curves in the market intersect.

When the supply and demand curves intersect, the market is in equilibrium. ... In this market, the equilibrium price is $6 per unit, and equilibrium quantity is 20 units. At this price level, market is in equilibrium. Quantity supplied is equal to quantity demanded

Equilibrium price is the price where the demand for a product or a service is equal to the supply of the product or service. At equilibrium, both consumers and producers are satisfied, thereby keeping the price of the product or the service stable.

All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. But when you're an income investor, your primary focus is generating consistent cash flow from each of your liquid investments.

While cash flow can come from bond interest or interest from other types of investments, income investors hone in on dividends. A dividend is the distribution of a company's earnings paid out to shareholders; it's often viewed by its dividend yield, a metric that measures a dividend as a percent of the current stock price. Many academic studies show that dividends account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.

Johnson & Johnson in Focus

Headquartered in New Brunswick, Johnson & Johnson (JNJ) is a Medical stock that has seen a price change of -0.84% so far this year. Currently paying a dividend of $0.95 per share, the company has a dividend yield of 2.63%. In comparison, the Large Cap Pharmaceuticals industry's yield is 2.63%, while the S&P 500's yield is 1.88%.

In terms of dividend growth, the company's current annualized dividend of $3.80 is up 1.3% from last year. In the past five-year period, Johnson & Johnson has increased its dividend 5 times on a year-over-year basis for an average annual increase of 6.21%. Future dividend growth will depend on earnings growth as well as payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. Johnson & Johnson's current payout ratio is 44%. This means it paid out 44% of its trailing 12-month EPS as dividend.

Looking at this fiscal year, JNJ expects solid earnings growth. The Zacks Consensus Estimate for 2020 is $9.03 per share, which represents a year-over-year growth rate of 4.03%.