Question

5. There are 100 patients who could benefit from a new drug, Tipilor, manufactured by Zifer. Patient i has willingness to pay i, i=1,…,100. Ignore fixed costs and assume marginal cost, c, is constant.

a) What is the profit maximising price and resulting profit?

b) Now assume all patients have insurance which means they only pay 10% of the price as a co-payment. What is the profit maximising price and resulting profit?

c) Zifer sets up a charity to cover the co-payment for poor people. Patients 1, 2, …, 50 are considered poor. What is the profit maximising price and resulting profit?

d) For c = 10, calculate optimal profit in a), b) and c) and conclude whether setting up the charity is profitable.

[25 marks]

Answer 1

Answer:

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