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.

Solution Summary

Lerner Index, Profit Maximization, first-degree and price discrimination are investigated.

What is a Lerner index?
If a manufacturing company has a rather unique product that sells for $15 per unit, and the marginal cost is $7.50 what is the Lerner index?
Does this index indicate market power?
Please step me through this.

1) If the demand function is P = 10 - Q, the marginal cost is constant at 4 and the total cost function is 4Q, what is the profit maximizing monopoly output and profit? What is the price elasticity at the monopoly price and output?
2) What is the Lerner-Index of Market Power for this monopoly at this price and output?
3) W

A firm has $1 Million in Sales, a Lerner Index of 0.65 and a marginal cost of $35 and competes against 1,000 other firms in its relevant market.
a. What price does the firm charge it customers? Show formula to explain how do this.
b. By what factor does this firm mark up its price over marginal cost?
c. Do you thinkthis fir

2. This question is based on Figure 2.
a. If the Bijou did not engage in 3rd degree pricediscrimination, then the price of a ticket would be $______ , there would be _______ kid patrons and ______ adult patrons and total revenue from the sale of tickets would be $_______.
b. If the Bijou did engage in 3rd degree price d

1. The following table shows data for a simple production function.
Capital(K) Labor(L) Total Product(TP) Average Product(AP) Marginal Product(MP)
Column 1 numbers = Capital ; Column 2 numbers = Labor; Column 3 numbers= Total Product
10 0 0

Hi,
You are the manger of a monopoly that sells a product to two groups of consumers in different parts of the country. Group 1's elasticity of demand is -2, while group 2's elasticity of demand is -6. Your marginal cost of producing the product is $10.
a) Determine your optimal markups and prices under third degree price

What is third-degree price discrimination?
What three conditions must be met for third-degree price discrimination to be feasible?
Give examples of firms that use third-degree price discrimination.

Which of the statements about price discrimination is FALSE?
Question 8 answers
It must be possible to segment the market.
It must be difficult to transfer the seller's product from one market segment to another.
Public utilities practice first-degreeprice discrimination.
There must be differences in the

Revenue maximization occurs when a firm sells at a price:
Select one:
a. that is equal to its minimum average variable cost
b. where its marginal revenue is equal to its marginal cost
c. where its marginal revenue is zero
d. None of the above
Which of the following is true for price discrimination:
Select on