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Profit-Maximizing Level Of Output Assignment Paper
Learning Activity 6 The diagram below shows the demand curve, marginal cost (MC) and marginal revenue (MR) curves for a new heart medication for which the pharmaceutical firm holds a 20 - year patent on its production and sales. This protection gives the firm monopoly power for the 20 years of the patent. Refer to the above graph, answer the following questions: a. Assume this pharmaceutical firm charges a single price for its drug. At its profit-maximizing level of output it will produce Answer: b. Assume this pharmaceutical firm charges a single price for its drug. At its profit-maximizing level of output, consumer surplus is represented by Answer: c. Assume this pharmaceutical firm charges a single price for its drug. At its profit-maximizing level of output, it will generate a total profit represented by Answer: d. Assume this pharmaceutical firm is practicing perfect price discrimination among its buyers. At its profit-maximizing level of output it will produce Answer: e. Assume this pharmaceutical firm is practicing perfect price discrimination among its buyers. At its profit-maximizing level of output, consumer surplus is represented by Answer: f. Assume this pharmaceutical firm charges a single price for its drug. At its profit-maximizing level of output, it will generate a deadweight loss to society represented by Answer: Profit-Maximizing Level Of Output Assignment Paper
Step 1/4
a) At its profit-maximizing level of output, the pharmaceutical firm will produce where marginal cost (MC) equals marginal revenue (MR). Looking at the graph, we can see that MC intersects MR at a quantity of Qo units. Therefore, the firm will produce Qo units of the drug.
at its profit-maximizing level of output, the pharmaceutical firm will produce where marginal cost (MC) equals marginal revenue (MR)
Step 2/4
b. At its profit-maximizing level of output, consumer surplus is represented by the area between the demand curve and the price charged by the firm. Since the firm is charging a single price, the price charged will be the same for all units sold. From the graph, we can see that the price charged is PO per unit. At the profit-maximizing level of output , the quantity demanded is Qo units. Therefore, consumer surplus is represented by the area of the triangle above the price charged and below the demand curve, which is D+E or 1/2*PO×Qo Profit-Maximizing Level Of Output Assignment Paper
consumer surplus is represented by the area of the triangle above the price charged and below the demand curve
Step 3/4
c) At its profit-maximizing level of output, the firm's total profit is represented by the rectangle bounded by the price charged and the quantity produced, minus the total cost of production. From the graph, we can see that the price charged is Po per unit, and the quantity produced is Qo units. Therefore, the total revenue generated by the firm is Po×Qo. The total cost of production can be found by looking at the point on the MC curve that corresponds to a quantity of Qo units. From the graph, we can see that the cost of producing Qo units is P2 per unit, so the total cost is P2×Qo Therefore, the total profit is PoQo−P2Q0. Profit-Maximizing Level Of Output Assignment Paper
At its profit-maximizing level of output, the firm's total profit is represented by the rectangle bounded by the price charged and the quantity produced, minus the total cost of production.
Step 4/4
d) If the firm is practicing perfect price discrimination, it can charge each buyer the maximum amount they are willing to pay for each unit of the drug. In this case, the firm will produce where the demand curve intersects the MC curve, which is a quantity of Q1 units. Therefore, the firm will produce Q1 units of the drug.
If the firm is practicing perfect price discrimination, it can charge each buyer the maximum amount they are willing to pay for each unit of the drug
Final answer
e) Under perfect price discrimination, there is no consumer surplus because the firm is charging each buyer the maximum amount they are willing to pay. Therefore, consumer surplus is equal to zero. Profit-Maximizing Level Of Output Assignment Paper
f)At the profit-maximizing level of output, a monopolist can generate a deadweight loss to society because the price charged is higher than the marginal cost of production, resulting in some potential buyers being priced out of the market. In this case, the deadweight loss is represented by the triangle between the demand curve, the MC curve, and the quantity produced. From the graph, we can see that the quantity produced is Qo units, and the difference between the price charged and the MC is P0−P2 Therefore, the deadweight loss is (1/2) x Qo×P2
Profit-Maximizing Level Of Output Assignment Paper
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