Your firm spent $100 million developing a new drug. It has now been approved for sale, and each pill costs $1 to manufacture. Your market research suggests that the price elasticity of demand in the general public is -1.1.
a) What price do you charge the public? What would happen to profits if you charged twice as much? What role does the $100 million in development costs play in your pricing decision? The Medicaid agency has made a take-it-or-leave-it offer of $2 per pill. Do you accept? Why or why not?
b) The table shows output and cost data. Calculate the average total cost, average fixed cost, average variable cost, and marginal cost schedules. If the price were $500, should the firm shut down in the short run? In the long run?
Quantity 0 5 10
|
Quantity
|
0
|
5
|
10
|
15
|
20
|
25
|
30
|
35
|
|
Total Cost
|
$20,000
|
$20,500
|
$20,975
|
$21,425
|
$21,850
|
$22,300
|
$22,775
|
$23,275
|