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Profit Maximization & Social Welfare

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Think of a company with which you are familiar. What issues of social responsibility must that company address? What consequences might company face if those issues are not addressed?

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https://brainmass.com/business/business-philosophy-and-ethics/profit-maximization-social-welfare-336107

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According to Shah (2010) there is an important debate regarding the issues of profit maximization and social welfare. According to this author, maximizing profits illustrates the greatest commitment to shareholder and stakeholders. In this particular theory, according to the author, the managerial staff is only committed to maximize the bottom line in terms of profits: a means to an end in order to achieve the highest possible profits. On the other hand, according to this author, society's welfare illustrates a common goods approach; in this particular approach managerial staff attempts to achieve a balance between the bottom-line and social welfare of the society and employees.

According to Shah (2010) these two theories assume that managerial issues are constrained and objective; stakeholders versus society; on the other hand, the reality proves a rather multidimensional reality; stakeholders versus society versus culture versus religion versus diversity versus globalization versus many other unpredictable factors; further, both of these theories appear to be better suited for larger organizations; small businesses encounter more immediate issues such as revenue and cash flow rather than managerial ethics.

However, according to Shah (2010) there is more to the issue of ethics. According to this author, given the fact that both competing theories consider some sort of managerial ...

Solution Summary

According to this author there is an important debate going on between the issues of social welfare and profit maximization. While the managerial appproach of profit maximization is to achieve the highest possible profits, the social welfare approach illustrates a common goods approach; on the one hand, managerial issues are constrained and objective: stakeholders versus society; on the other hand, the reality proves a rather multidimensional approach: stakeholders versus society versus culture versus religion versus diversity versus globalization and many other unpredictable factors.

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Pricing: Lerner Index, Profit Maximization, first-degree price discrimination, etc.

The patented drug, Botox, is currently sold by Allergan, Inc. The current price for a vial of Botox, is $400, and the marginal cost to produce a vial is $25.

a) Using the Lerner index, find the price elasticity of demand for Botox and interpret what this value means to total revenue if the price of Botox were increased one percentage point.

Note: Lerner Index is the difference between price and marginal cost dived by price. L = (p-MC)/P The larger the L the greater the degree if monopoly power.

b) The inverse demand for Botox is: P = 775 - 375Q, where Q represents millions of vials of Botox and P is in dollars per vial. Derive the marginal revenue curve and find the price and quantity Allergen will set in order to maximize its monopoly profits.

c) Draw a diagram of the firm's inverse demand, marginal revenue, MC, and optimal price and quantity. In addition, show the areas of consumer surplus, producer surplus, and deadweight loss and calculate their values (in dollars).

d) If Allergen is able to use first-degree price discrimination, what is the lowest price it will charge for a vial of Botox? Explain the concept of first degree price discrimination, and show how social welfare will be affected if Allergen is permitted to set price in this way.

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