Question

A drug company discovered a new vaccine to fight the covid-19 virus. So far it sold 200 doses, and faces the following ATC schedule: q ATC

200 $200

201 $201

If a new customer offers to pay $300 for 1 dose, should the drug company make one more vaccine?

Answer 1

We are given :

Quantity	Average total cost
200	$200
201	$201

We know that :

Average total cost = Total cost / total quantity

200 = TC / 200

200 × 200 = TC

40,000 = TC

and,

201 = TC / 201

201× 201 = TC

40,401 = TC

Quantity	Average total cost	Total cost
200	$200	40,000
201	$201	40,401

Here, P × Q = Total Revenue

(1) 40,000 × 200 = 8,000,000

Profit = TR - TC

Profit = 8,000,000 - 40,000 = 7,960,000 i.e TR > TC Firm should continue producing.

(2) 40,401 × 201 = 8,120,601

Profit = TR - TC

Profit = 8,120,601 - 40,401 = 8,080,200 TR > TC Firm should continue producing.

If a new customer offers to pay $300 for 1 dose

Quantity	Total cost	Avg TC ( TC / Qty.)
1	300	300

Here, P × Q = Total Revenue

300 × 1 = 300

Profit = TR - TC

Profit = 300 - 300 = 0

The firm profits are ZERO at this level of producing vaccine.

The drug company should not make one more vaccine because producing any additional output unit will result in economic loss.