What are the profit maximizing levels of P and Q that the drug manufacturer should choose? Explain briefly how you identify these values.

ECO 2 – Principles of Economics II

Dr. Roberto Mazzoleni

UNIT 7 – Homework Assignment – Due 4.25.23 (11:59pm)

Question 1

The table below includes simplified data on the market demand for an antihistamine drug as well as data on the total costs incurred by the firm offering this drug to the public.

 Quantity Price Total Revenues Marginal Revenue Total Cost Fixed Cost Marginal Cost ATC 0 \$6.00 \$0.70 1 \$5.50 \$1.70 2 \$5.00 \$2.70 3 \$4.50 \$3.70 4 \$4.00 \$4.70 5 \$3.50 \$5.70 6 \$3.00 \$6.70 7 \$2.50 \$7.70 8 \$2.00 \$8.70 9 \$1.50 \$9.70 10 \$1.00 \$10.70 11 \$0.50 \$11.70

• Complete the table by calculating the total revenues, marginal revenue and marginal cost corresponding to each level of production/sales in the table.
• What are the profit maximizing levels of P and Q that the drug manufacturer should choose? Explain briefly how you identify these values.
• Draw a diagram illustrating the demand curve for the drug, its marginal cost, and identify the P and Q pair that you selected at (b).
• Use your diagram and data to estimate the consumer and producer surpluses corresponding to the profit-maximizing price and output you chose.

Question 2

For each of the following events explain whether or not it would contribute to the realization of economies of scale by the relevant business firms.

• Large supermarkets being able to drive down the cost of purchasing milk as it increases its scale of business.
• The higher the number of restaurant visitors making dinner reservations on Open Table, the more likely it is that Open Table will be able to sell reservation services to additional restaurants.

Question 3

The following data provide estimates for the price elasticity of demand for Hass avocados in a handful of US metropolitan markets.

 Metro Area Price elasticity Atlanta 1.24 Boston 1.19 Denver 1.39 Detroit 1.51

• Assuming that pricing decisions for these markets are made by a monopolistic firm (or trade association), which of these metropolitan markets is characterized by the largest markups? Explain your answer.
• The price elasticity of demand for Hass avocados in the Dallas/Fort Worth market has been estimated to be 0.75. Assuming again that the pricing decisions are being made by a monopolist firm, do you think that this firm has selected its profit maximizing price for avocados?  If not, should the firm increase or decrease the price of its avocados?  Explain clearly.