Question

Methyl methacrylate (MM) is a plastic that has a variety of industrial uses (for instance, as an input to Plexiglas and to coatings like latex paints, lacquer, and enamel resins). The dental trade also uses it to make dentures. This question considers two broadly defined users of MM: industrial and dental. Trace amounts of arsenic are occasionally found in MM, although they can be completely removed either by the consumer or by the producer. The FDA forbids the sale of dentures made with anything but pure MM, so the dental consumers must either remove the impurities themselves or buy pure MM. Industrial consumers do not care about the presence of arsenic. Industrial consumers can resell MM to dental consumers.

The following table depicts the values the two types of consumers derive from using the two 4 types of MM.

	Consumers’ Willingness to Pay ($/pound)
	Pure MM	MM with Trace Amounts of Arsenic
Dental	22	11
Industrial	4	4

At prices below or equal to their willingness to pay, dental consumers will use 30,000 pounds per year of either type of MM.   At prices below or equal to their willingness to pay, industrial consumers will use 150,000 pounds per year of either type of MM.

Lohm & Haas is the only manufacturer of MM and the company behaves as a monopolist. Their marginal costs are $3/pound for MM with trace amounts of arsenic and $6/pound for pure MM.

Lohm & Haas’ chemical engineers have discovered a new process for manufacturing MM. The new process lowers the marginal costs of producing MM with trace amounts of arsenic but makes it proportionately more expensive to remove the arsenic to make pure MM. With the new process, marginal cost of producing a pound of MM with trace amounts of arsenic would fall to $2/pound and the marginal cost of producing a pound of pure MM would remain $6/pound.

If they adopted the new production technology, what would be the profit-maximizing way for Lohm & Haas to price pure MM and MM with trace amounts of arsenic?

Answer 1

Lets us Consider ,

Pure MM as PMM

MM with trace amount of arsenic as AMM

Calculation of Total Sales by Dental Trade:

PMM - 30000*22 Pounds = 660000

AMM - 30000*11 Pounds = 330000

Total sales by dental Trade = 990000.

Calculation of Total Sales by In Industrial Trade:

PMM or AMM - 150000 * 4 Pounds = 600000

Total Sales of Industrial Trade = 600000

Calculation of Profit from Trade :

Profit by the dental Trade

Costing 6pound per PMM

Profit (22-6) = 16*30000 = 480000

Costing 3pound per AMM

Profit (11-3) = 8*30000 = 240000

Costing 1pound per AMM

Profit (11-1) = 10*30000 = 300000

Total profit of dental Trade by the old technology = 480000+240000= 720000.

Total profit of dental Trade by the new technology = 480000+ 300000= 780000.

Profit by the industrial trade :

Costing 3pound per AMM

Profit (4-3) = 1*150000= 150000

Costing 1pound per AMM

Profit (4-1) = 3*150000=450000

By comparing Profit of Dental Trade and Industrial Trade (Old Technology)

(Dental Trade profit 720000 ) > (Industrial Trade profit 150000)

By Comparing Profit of Dental Trade and Industrial Trade (New Technology)

(Dental Trade Profit 780000) > ( Industrial Trade Profit 450000)

Therefore comparing to the old and new technology , the new technology is more effective and give more profit than the Old one it's shows the positive difference of 60000 Pounds of Dental Trade profit and 300000 pounds of Industrial Trade profit .