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Economics

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Sorry, it's long. I've tried everything to solve this, I have no clue how they got any of the MR figures, I calculated MR and I got 0.5. Help please.

* A drug company currently sells 3 million AIDS treatments in rich countries at P = $80 per treatment.
* In order to sell 6 million AIDS treatments in poor countries the drug company would have to lower price to $30 per treatment.
* Marginal cost is constant and equal to $10 per treatment in both countries.
* If the drug company cannot prevent re-sale between rich and poor countries then the marginal revenue per treatment of increasing output from 3 million (serve rich only) to 9 million (serve both rich and poor) is equal to___



a. $30 per treatment which is greater than the marginal cost of $10 per treatment and thus implies that profits will rise if the poor buyers are served.
b. $5 per treatment which is less than the marginal cost of $10 per treatment and thus implies that profits will fall if the poor buyers are served.
c. $30 per treatment which is less than the marginal revenue of $80 per treatment received from the rich buyers and thus implies that profits will fall if the poor buyers are served.
d. $30 per treatment which is greater than zero and thus implies that profits will rise if the poor buyers are served.
e. $20 per treatment which is greater than the marginal cost of $10 per treatment and thus implies that profits will rise if the poor buyers are served.

  • Economics -

    Marginal revenue is also known as Price (P). So, in rich countries MR=80. If it serves the poor countries MR=30. If it serves the poor countries with a goal of 6-million treatment and since it cannot prevent re-sale, price (MR) in the rich country also drops to 30.

    Now then, MC is a constant 10. If it only serves the rich country, MR=80, meaning profit per treatment is 70. At 3-million sales, total profit becomes 210-million. If it serves both rich and poor, profit per treatment drops to 20. Total profit would be 9*20 = 180-million.

    While I don't like the wording, c) seems to be the only possible correct answer.

  • Economics -

    Thanks for the help. I did end up getting the answer right, miscalculated the first couple times I did it.

    MR = change in TR/ change in q
    change in tr= ((9mil*30)-(3mil*80)
    =270mil-240mil
    =30 mil
    change in q= 9mil-3mil
    =6mil

    MR=30/6
    =$5
    Since 5 is less than mc, you have gone past the profit max. point and profit will fall.

    So B.

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