Thursday

August 28, 2014

August 28, 2014

Posted by **Nathan** on Monday, October 29, 2007 at 5:38pm.

* 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 -
**economyst**, Tuesday, October 30, 2007 at 9:48amMarginal 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 dont like the wording, c) seems to be the only possible correct answer.

- Economics -
**Nathan**, Thursday, November 1, 2007 at 2:15amThanks 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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