# Price, quantity and profits

12) You are the manager of a small pharmaceutical company that received a patent on a new drug three years ago. Despite strong sales ($125million last year) and a low marginal cost of producing the product ($0.25 per pill), your company has yet to show a profit from selling the drug. This is, in part due to the fact that the company spent 1.2 billion developing the drug and obtaining FDA approval. An economist has estimated that, at the current price of $1.25 per pill, the own price elasticity of demand for the drug is -2.5. Based on this information, what can you do to boost profits? Explain

14) You are the manager of College computers, a manufacturer of customized computers that meet the specifications required by the local university. Over 90 percent of your clientele consists of college students. College Computers is not the only firm that builds computers to meet this university's specifications; indeed, it competes with many manufacturers online and through traditional retail outlets. To attract its large student clientele, College Computers runs a weekly ad in the student paper advertising its 'free service after the sale" policy in an attempt to differentiate itself from the competition. The weekly demand for computers produced by College Computers is given by Q=1000 -P and its weekly cost of producing computers is C(Q) = 2,000 +Q2. If other firms in the industry sell PCs at $600, what price and quantity of computers should you produce to maximize your firm's profits? What long run adjustments should you anticipate? Explain?

#### Solution Preview

12) From the conditions, we have:

TR=PQ=125(million)

MC=0.25

FC=1200(million) but it's not sure whether the expense is in this year or last year. We just take it as this year's fixed cost. Then we will have negative profit.

P=1.25

dQ/dP * P/Q= -2.5

then Q=TR/P=125/1.25=100

so dQ/dP=-2.5Q/P=-2.5*100/1.25=-200

we can get demand curve from: 125= A-200*1.25 or A=375

then demand curve is Q=375-200P or P=1.875-0.005Q

so total revenue curve is: ...

#### Solution Summary

The solution explains the concept of profit maximization and total costs through the use of questions given in the posting. The solution does a great job of explaining the concepts and then determining the right answer for the two problems in the question. The solution is very easy to understand and follow along. Overall, an excellent response.