Purchase Solution

How to derive MR from demand and find optimal output

Not what you're looking for?

Ask Custom Question

Assume the graph attached represents the market demand for a patented prescription drug together with the long run marginal cost and average cost functions for producing the drug. (note: the diagram assumes that at output levels over 50 million AFC ~ 0, and MC is constant so that ATC = AVC =MC = $20)

A) Draw the marginal revenue function for this firm.
B) What is the profit maximizing price for this firm?
C) On the graph show the area which represents the net loss to society resulting from the monopoly power conferred by the patent.
D) What do you predict will happen to the structure of competition and to the price in this market when the patent expires ? (Hint: use the concept of "Minimum efficient scale " of production in your answer.) .

Attachments
Purchase this Solution
Solution Summary

The question begins with cost and demand data for a firm. from demand marginal revenue is derived. given marginal revenue the optimal level of output for the firm is solved for. The results are graphed and a brief discussion regarding the loss of surplus is provided. the question compares outcomes under perfect competition with those of monopoly.

Solution Preview

Please see the attached file for full explanations and graph.

Assume the graph below represents the market demand for a patented prescription drug together with the long run marginal cost and average cost functions for producing the drug. (note: the diagram assumes that at output levels over 50 million AFC ~ 0, and MC is constant so that ATC = AVC =MC = $20)

A)Draw the marginal revenue function for this firm.
Recall that MR is just the change in TR divided by the change in Output. The rule of thumb is that MR is twice as steep and demand. This can also be solved by taking the derivative of TR = P*Q where you would plug in the ...

Purchase this Solution
Free BrainMass Quizzes
Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

View More Free Quizzes
Related BrainMass Solutions

  • Firm's Optimal Quantity, Price and Profit

    Suppose a firm's inverse demand curve is given by P=120- .5Q, and its cost equation is C=420+60Q+ Q2 (1) Find the firm's optimal quantity, price, and profit (1) by using the profit and marginal profit equations and (2) by setting MR equal to MC.

  • Determining the optimal price and output combination

    This conflict makes collusive agreements difficult to maintain. Solutions depict the methodology to find optimal output and price levels in different market structures.

  • Optimal Pricing and Consumer Surplus at a Gym

    We derive MR from the Demand curve.

  • Cost-Plus Pricing: Calculating % Markup at Optimal Q and P

    To find Marginal Revenue (MR), first find Total Revenue (TR): From the demand curve: Q = 100 - P Rearranging: P = 100 - Q TR = PQ TR = (100 - Q)Q TR = 100Q - Q^2 MR is the derivative of TR: MR = 100 - 2Q To find the optimal (profit-maximizing

  • Packages of bran muffins: Optimal package size and price

    derivative of Total Cost (TC): TC = Q MC = 1 To find the optimal quantities, let MR = MC: 3 - Q = 1 Q = 2 From the demand curve: P = 3 - 0.5Q P = 3 - 0.5(2) P = 2 Therefore the optimal number of muffins in a package is 2, and the optimal

  • the monopolist's optimal quantity and price

    60,000 Derive the price for the monopolist's optimal quantity and price and other functions.

  • Managerial Economics - Optimal Output and Pricing

    From the demand curve: P = 200 - 4Q P = 200 - 4(10) P = 160 b) The firm should charge $160 for the package. This solution shows how to use marginal analysis to calculate a firm's profit-maximizing Quantity and Price.

  • Marginal revenue equation

    (a) Derive the marginal revenue equation Total Revenue (TR)=P*Q Write Demand: Q = 40-2P(Q) as P(Q) = (40-Q)/2 TR= (20 - Q/2)*Q = 20 Q-Q^2/2 MR=dTR/dQ = 20-Q (b) Find the quantity at which profits are maximal. given that quantity, find the price

  • QopyQat Printing: Profit Maximization

    Given QopyQat's Demand and Cost functions, this solution shows how to calculate the firm's optimal price and output, even when conditions change.

  • Finding optimal number of output

    MR and MC curves intersect each other at a point where output level is Q2. It is the optimal output level. What will the firm charge? A vertical line from this point cuts the demand curve at a point where price=P3.

View More Related Solutions