(d) What will be the new optimal price and quantity of SinPharm if FC increases? (e) Has the increase in FC any implications for running the business? Hi, may i have the detailed answer for part (d) and (e)? Thank you.
You are consultant at large international consultancy (“PharmCons”), specialized in consulting firms in the pharmaceutical industry. PharmCons has its Asian-Pacific headquarter in Singapore. Dr. Lee, the CEO of a newly established Singaporean pharmaceutical firm (“SinPharm”), which owns the protected patent for vaccine for Dengue-fever, approaches PharmCons. He is an excellent biologist but he and his employees are not well trained in
Your colleagues at PharmCons have already estimated the
The (inverse) demand for the vaccine is estimated as P = 301 - 4Q. The marginal costs (MC) are equal to MC = 1 and fixed costs (FC) are equal to FC = 1000.
Your boss ask you to provide Dr. Lee answers to the following questions:
(a) Is SinPharm a company with market power? Explain.
Yes, the company SinPharm has market power because the company is a price maker and not a price taker. The company is a price maker because it is a
Patent laws are granted to the company that has come up with a certain innovation. Because of the patent law, no other company is allowed to enter the market thereby enabling SinPharm to make positive economic profits until the patent period expires. This creates an incentive for the companies to innovate.
Thus until the expiry of the patent, we can say that SinPharm is a company with market power.
(b) What is SinPharm’s marginal revenue (MR) function?
P = 301 - 4Q
Total revenue = Price * Quantity
TR = P * Q
TR = [301 - 4Q] * Q
TR = 301Q - 4Q2
Differentiating the above total revenue function with respect to the quantity, we get the marginal revenue function.
dTR/dQ = MR
MR = 301 - 8Q
Thus, SinPharm’s marginal revenue (MR) function is MR = 301 - 8Q
(c) What are the initial optimal price and quantity of SinPharm?
Profit maximizing quantity is whether marginal revenue is equal to marginal cost i.e. MR = MC
MR = MC
301 - 8Q = 1
301 - 1 = 8Q
8Q = 300
Q = 300/8
Q = 37.5
Optimal quantity that must be produced by SinPharm is 37.5 units
Substitute Q = 37.5 in P = 301 - 4Q
P = 301 - 4*37.5
P = 301 - 150
P = 151
The optimal price that must be charged by SinPharm is 151.
---- Part II ----
Dr. Lee appreciates this information and sets price for the vaccine according to your advice. But after a year he approaches your boss again. Dr Lee is afraid that the FC of production of the vaccine increased to 6000 and ask:
(d) What will be the new optimal price and quantity of SinPharm if FC increases?
(e) Has the increase in FC any implications for running the business?
Hi, may i have the detailed answer for part (d) and (e)? Thank you.
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