Mirk Labs, Assuming The Variable Costs (Production Cost Per Unit)
Mirk Labs is a pharmaceutical company that currently enjoys a patent monopoly in Europe, Canada, and the United States on Zatab, an allergy medication. The global demand for Zatab is: Qd = 15.0 – 0.2P where Qd is annual quantity demanded (in millions of units) of Zatab, and P is the wholesale price of Zatab per unit. A decade ago, Mirk Labs incurred $60 million in research and development costs for Zatab. Current production costs for Zatab are constant and equal to $5 per unit. (a) What wholesale price will Mirk Labs set? How much Zatab will it produce and sell annually? How much annual profit does the firm make on Zatab? (b) The patent on Zatab expires next month, and dozens of pharmaceutical firms are prepared to enter the market with identical generic versions of Zatab. What price and quantity will result once the patent expires and competition emerges in this market? Explain your answer. Total must be at least 3 pages not including the question itself.
MIRK LABS
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a) What wholesale price will Mirk Labs set? How much Zatab will it produce and sell annually? How much annual profit does the firm make on Zatab?
Qd = 15.0 – 0.2P
Rearranging this then 0.2P=15-QdP=75-5Qd
Revenue=P*Q (75-5Q)*Q75Q-5Q2
Since marginal revenue is the derivative of the total revenue MR=75-2*5Q75-10Q
Assuming the variable costs (production cost per unit) = marginal costs (MC) is then $ 5
At the profit maximizing output MC=MR$5=75-10Q
10Q=70 and Q=7
Substituting in the price formula P=75-5Qd, this is 75-5(7) = $40
Profit= Revenue- Costs (75-5(7)*7-$5*7, or ($40-$5)*7 Million, where the cost of production is $5 per unit* number of units 7, and hence Profit = 280-35=$245 million
Wholesale Price is $40
Production Units 7 million
Annual Profit is $245 million
Returns above the normal profits are the economic profits and if the total revenue is equal to the economic cost, the economic profit is zero (Devlin, 2014). The marginal costs are the extra costs when there is a production of one additional unit and the marginal revenue is the additional revenue when there is increased sale of one extra unit. The variable costs change with changes in output, while the marginal costs helps in determining price and output that the firm operates (McEachern, 2011). The management of Mirk Labs must consider pricing and output decisions, which affect profitability. In any case, the profit maximize point is where the marginal revenues equal to the marginal costs, where the marginal revenue is 75-10Q and the marginal cost is 5. Since profit is the revenue minus the costs the annual profitability, while revenue is price multiplied by quantity. The difference between price and costs is $35 ($40-$5), and the profit is $ 35 multiplied by output, 7 million units.
Intellectual property rights bestow exclusive rights and competition is in other front in the pharmaceutical industry and not in the allergy medication sector. When the patent can no longer provide value it is no longer a resource that separates the firm’s competitiveness. Even as the revenue should be higher than the costs to remain profitable, Mirk Labs does not face high competition from the other drug manufacturers. Even as the optimum output rule for the profit maximization of output highlights that the marginal costs equal the marginal revenue, this is applicable when the total revenue is higher than the total revenue costs.
(b) The patent on Zatab expires next month, and dozens of pharmaceutical firms ...