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Pharmaceutical Companies: Monopoly Over Production

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Suppose that a pharmaceutical company has a monopoly over the production of master cream, a drug used on skin rashes. Further suppose that the demand for master cream is given by the expression QD = 1,500 - P, where QD is the quantity demanded (in bottles) and P is the price. Assume that the company's costs are given by the expression
TC = 100 - Q^2 + 5Q^3.

a) What is the profit-maximizing level of output of master cream (in bottles)?
b) What is the profit-maximizing price?
c) What is the maximum level of profit?

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Solution Preview

a) The profit-maximizing level of output is where Marginal Revenue (MR) = Marginal Cost (MC)

To find MR, first find Total Revenue (TR)
TR = PQ

Because the company is a monopoly, its ...

Solution Summary

This solution shows how to calculate the profit-maximizing quantity and price for a pharmaceutical company that has a monopoly over the production of a master cream. All the calculations are shown in detail.

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Explain the difference between a monopoly, an oligopoly and a cartel with examples

You have been contracted by an economic consulting firm to determine the economic structure and possible future actions of OPEC, the Organization of Petroleum Exporting Countries.

Using the Library, the Internet, and your course materials, find websites that offer this information and answer the following questions (Perloff, 2007).

1. Explain the difference between a monopoly and an oligopoly, and a cartel.
2. Provide an example of a monopoly, an oligopoly, and a cartel.
3. Discuss the welfare effects of monopolies and oligopolies.
4. How does game theory explain the interactions of firms within oligopolies and cartels?
5. Using your own words, discuss the economic purpose of OPEC. What has happened to oil prices over the past five years?
6. Based on your answers to the above questions, synthesize the information you have gathered and tell the economic consulting firm which actions you think OPEC will take over the next year.

Summarize your research findings.

Reference

Perloff, J. M. (2007). Microeconomics (4th ed.). New York: Pearson Addison Wesley.

Instructor Comments: Most people do well defining and explaining each of the market types, their differences and giving examples. Where many papers need more work is in describing welfare effects, and applying game theory to the behavior of firms in Cartels. Welfare effects are measure using consumer surplus and producer surplus.

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