/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Q9. A drug company has a monopoly on... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 10: Q9. (page 410)

A drug company has a monopoly on a new patented medicine. The product can be made in either of two plants. The costs of production for the two plants are MC1 = 20 + 2Q1 and MC2 = 10 + 5Q2. The firm's estimate of demand for the product is P = 20 - 3(Q1 + Q2). How much should the firm plan to produce in each plant? At what price should it plan to sell the product?

Short Answer

Expert verified

The first plant should produce 0 units.

The second plant should produce 0.91 units.

The market price is $17.27 per unit.

Step by step solution

01

Computing production decision for each of the plants

The following diagram contains the two plants' marginal cost curves, the product's demand curve, and the marginal revenue curve.

The diagram shows that the marginal cost curve of the first firm is not relevant to the computation of the market conditions because it is above the demand curve.

Thus, the demand curve will only contain the quantity of medicine produced by the second plant. You can write the demand function as P = 20 - 3Q2.

The marginal revenue function will have twice the slope of the inverse demand function. Thus, you can write it as MR = 20 - 6Q2.

You can equate the marginal cost of the second firm to the marginal revenue to find the profit-maximizing output as follows:

20 - 6Q2 = 10 +5Q2

11Q2 = 10

Q2 = 0.91

Thus, the second firm produces 0.91 units, and the first plant should produce 0 units.

You can substitute the quantity into the inverse demand function to obtain the profit-maximizing price as follows:

P = 20 - 3(0.91)

= 20 - 2.73

= $ 17.27

Thus, the first plant should not produce anything as the product should be made entirely in the second firm. The second plant should produce 0.91 units and sell them at $17.27 per unit.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Suppose a profit-maximizing monopolist is producing 800 units of output and is charging a price of \(40 per unit.

a. If the elasticity of demand for the product is -2, find the marginal cost of the last unit produced.

b. What is the firm鈥檚 percentage markup of price over marginal cost?

c. Suppose that the average cost of the last unit produced is \)15 and the firm鈥檚 fixed cost is $2000. Find the firm鈥檚 profit.

The following table shows the demand curve facing a

monopolist who produces at a constant marginal cost of $10:

Price

Quantity

18

0

16

4

14

8

12

12

10

16

8

20

6

24

4

28

2

32

0

36

a. Calculate the firm鈥檚 marginal revenue curve.

b. What are the firm鈥檚 profit-maximizing output and price? What is its profit?

c. What would the equilibrium price and quantity be in a competitive industry?

d. What would the social gain be if this monopolist were forced to produce and price at the competitive equilibrium? Who would gain and lose as a result?

A certain town in the Midwest obtains all of its electricity from one company, Northstar Electric. Although the company is a monopoly, it is owned by the citizens of the town, all of whom split the profits equally at the end of each year. The CEO of the company claims that because all of the profits will be given back to the citizens,it makes economic sense to charge a monopoly price for electricity. True or false? Explain.

Suppose that industry is characterized as follows:

C = 100 + 2q2

each firm鈥檚 total cost function

MC = 4q

firm鈥檚 marginal cost function

P = 90 - 2Q

industry demand curve

MR = 90 - 4Q

industry marginal revenue curve

a. If there is only one firm in the industry, find the monopoly price, quantity, and level of profit.

b. Find the price, quantity, and level of profit if the industry is competitive.

c. Graphically illustrate the demand curve, marginal revenue curve, marginal cost curve, and average cost curve. Identify the difference between the profit level of the monopoly and the profit level of the competitive industry in two different ways. Verify that the two are numerically equivalent.

There are 10 households in Lake Wobegon, Minnesota, each with a demand for electricity of Q = 50 - P. Lake Wobegon Electric鈥檚 (LWE) cost of producing electricity is TC = 500 + Q.

a. If the regulators of LWE want to make sure that there is no deadweight loss in this market, what price will they force LWE to charge? What will output be in that case? Calculate consumer surplus and LWE鈥檚 profit with that price.

b. If regulators want to ensure that LWE doesn鈥檛 lose money, what is the lowest price they can impose? Calculate output, consumer surplus, and profit. Is there any deadweight loss?

c. Kristina knows that deadweight loss is something that this small town can do without. She suggests that each household be required to pay a fixed amount just to receive any electricity at all, and then a per-unit charge for electricity. Then LWE can break even while charging the price calculated in part (a). What fixed amount would each household have to pay for Kristina鈥檚 plan to work? Why can you be sure that no household will choose instead to refuse the payment and go without electricity?
See all solutions

Recommended explanations on Economics Textbooks

Taxation Economics

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.