Question

Under Obama Care (the Affordable Care Act), sellers or importers of medical devices pay a tax of 2.3% (of the price paid). Suppose annual U.S. market demand is expected to be Q = 10000-10P for a device your biomedical startup firm has patented and received FDA-approval. Costs to develop the device were $5 million and marginal costs are constant at $200 per unit. Fixed costs per year are $100,000. The device is not covered by health insurance (i.e., consumers must pay the full price).

(a) If the tax is repealed, how many devices should you sell per year? What price should you charge? What will be your annual profits?

(b) If the tax is implemented, how many devices should you sell per year? What price should you charge?

(c) Do you think the tax will reduce innovations in the biomedical device industry? Explain.

(d) Now suppose the tax is repealed and health insurance covers the device, so that consumers only pay 20 percent of the price (i.e., the copay" is 20 percent and the insurance company covers the other 80 percent). How many devices should you now sell? What is the price? How much do consumers pay for their copay?

Answer 1

If Q= 10000-10P

Then P = 1000-Q/10

Total Revenue (TR) = PQ = (1000 - Q/10)

 Q = 1000Q -Q2/10

 

Derving of this function TR=MR = 1000-2Q/10 = 1000-Q/5

 

Nex is to Set MR = MC and solve for Q

1000-Q/5 = Q/10

1000 = Q/10 +Q/5 = 3Q/10

Q = 10/3(1000) = 10000/3 Which can be rounded by 3333

 

To find the price Substitute Q

3333 = 10000-10P

  10P = 6667

      P = 6667/10

          = 666.7

 

A)

Total Quantity to sell (Without Tax 2.3%) = 3333

Price to be charged = $ 667.7

Annual Profit = Total Revenue - (Fixed Cost+Variable cost)

TR = 3333 * 667.7

= 2225444

= 2225444- ($100000+$ 666600)

= 2225444- $ 766600 

= 1458844

 

B)

If the tax is applicable for 2.3%

Total Quanity to be Produed = 2225444 - 2.3%(Tax deduction)

                                                    = 2174259 /652.3 (Price of Product)

 

Total Quantity produced if the Tax is implemented = 3333

Total price implementing the tax = 652.3

 

c)

In my opinion tax burden should reduced biometric industry. The biometric industry mainly focusing on the people who are sufferening from the deceses to make available to the quality of drugs for curing peoples deceses.In this case authority will take care about these industry to make the product available in the market for cheaper price and it will help to the society for better treatment care in the hospital that will help to the improvement of health livings in the society.

 

D)

If total tax is repealed the price will be arrved = $667.7

Customer Pay through Innsurance then the price is = #$ 667.7* 20/100 = $ 133.54

Cost of Insurane company for per price = $ 667.7 - $ 133.54 = 534.16

You can sell the Quantity (Q) = 3333

Customer to pay the per product is = #$ 667.7* 20/100 = $ 133.54

A) TR = 1458844

B) Total price implementing the tax = 652.3