[Hint: this draws on the rules for entry and exit from the review lectures. It is...

[Hint: this draws on the rules for entry and exit from the review lectures. It is a little bit more of a puzzle than a straight "do this computation". Remember the definition of marginal cost and marginal benefit you knew before you learned calculus!]

A friend of yours is a chemist; she's worked hard to discover a new drug that lets people do five hours' worth of work in one hour. She has sold 200 doses of the good, and faces the following average total cost schedule:

Q (doses)	ATC
199	$199
200	$200
201	$201

A new customer offers her $300 for a dose. By how much does her profit increase or decrease if she sells this additional dose?

Expert Solution

The average total cost of producing 199 units of drug is $199, that of producing 200 units is $200 and of 201 units is $201 units. My friend is selling 200 units of the drug, so he/she has to sell one more unit which 201 units in order to sell it to the new customer. Marginal Cost is the extra cost incurred for producing one extra unit of output.. In this case to produce one extra unit of output from 200 units to produce 201 units, the additional cost would be $201*201- $200 *200= $401 ( total cost = average total cost *number of units of good). The marginal benefit is the extra benefit the customer gets from consuming one extra unit of output.. The customer would be paying $300 for a dose. Therefore, the marginal benefit of the good for the customer is $300*201 - $201*201 = $60300 - $40401 =$19899. The marginal cost for producing one extra unit is $19899.

We do not know previously in which price my friend was selling the 200 units of the good. So, we cannot determine if the profit has increased or decreased from the previous scenario. However, we can say the marginal benefit tof the consumer exceeds the marginal cost of the producing the good.

Rahul Sunny answered 1 year ago

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