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1. Zypan, an anti-cancer drug, can be produced at a constant marginal cost of $5 per...

1. Zypan, an anti-cancer drug, can be produced at a constant marginal cost of $5 per pill. The R&D fixed costs associated with the production of Zypan are entirely sunk. Zypan is under patent protection. Accordingly, its sole producer is Dastro, the pharmaceutical firm that developed it. Dastro can sell Zypan in two different countries called Alpha and Beta. The demand for Zypan in Alpha is qA = 55 – pA. The demand for Zypan in Beta is qB = 70 – 2pB. a. Suppose that transportation costs are so high that Dastro can charge a different price for Zypan in Alpha and Beta. How many pills should Dastro sell in each country and what price should it charge in each country? Compute Dastro’s profits. b. Suppose, because of falling transport costs, it becomes impossible for Dastro to set a different price in each market. How many pills should Dastro sell and what price should Dastro charge. Compute Dastro’s profits? c. Is welfare higher or lower as a result of the decline in transport costs? d. Suppose that, as a result of a shortage in the supply of one of the key ingredients needed to produce Zypan, the marginal cost of production rises to 20. Assuming that transportation costs are still zero, what price should Dastro charge and how many units should it produce? What are Dastro’s profits?

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Answer #1

Under equilibrium conditions, MR=MC

Total Revenue = QaPa = 55Pa - Pa2

MR = 55 - 2Pa = MC = 5

Pa = 50/2= 25

Qa = 55-25 = 30

TR in case of B = 70Pb - 2Pb2

MR = 70 - 4Pb =MC =5

65/4 = 16.25 = Pb

Qb = 70 - 32.5 = 37.5

B). In this case, we add the demand duces in both the cases and take p common,

Thus Total Quantity = 55 + 70 - 3P

Total Revenue = 125P - 3P2

MR = 125 - 6P = = MC = 5

120/6 = P

20 = P

Quantity = 125 - 60=65

Total Profits = 65(20-5) = 65*15=975

The welfare is lower. This is because the total quantity supplied is less when transportation costs have lowered.

D). MR = 125 - 6P = MC = 20

105 =6P

P=17.5

Units produced =125-3(17.5)=72.5

Profits =72.5(-2.5)= - 181.5

Thus losses are incurred when marginal costs infrease to 20

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