1. Enrodes is a monopoly provider of residential electricity in a region of northern Michigan. Total demand by its 3 million households is given by Q=11 – P so that marginal revenue is MR=11– 2Q. The total cost of Enrodes is given as C=16 +Q so that marginal cost is $1 per megawatt-hour. Consumers in this region of Michigan have recently complained that Enrodes is charging too much for its services. In fact, few consumers are so upset that they are trying to form a coalition to lobby the local government to regulate the price Enrodes charges.
If consumers are successful in their lobbying efforts and regulation is placed on Enrodes, calculate the price, output and profit of Enrodes under the following circumstances. Show your calculations in each case.
A. Regulator institutes average-cost pricing.
B. Regulator institutes marginal-cost pricing.
2. You are the manager of a small pharmaceutical company that received a patent on a new drug three years ago. Despite strong sales ($150 million last year) and a low marginal cost of producing the product ($0.50 per pill), your company has yet to show a profit from selling the drug. This is, in part, due to the fact that the company spent $1.7 billion developing the drug and obtaining FDA approval. An economist has estimated that, at the current price of $1.50 per pill, the own price elasticity of demand for the drug is -2. Based on this information, what can you do to boost profits? Explain with proper calculations.