You are the manager of a company that vaccinates human beings for biological dis

Question

You are the manager of a company that vaccinates human beings for biological diseases. Your company uses two inputs to produce vaccinations: physicians and laboratories. However, this is a short-run analysis where physicians are variable but laboratories are fixed. Suppose that each physician costs $500 per day (for an annual salary of about $175,000) and the daily cost for the laboratory is $1,500 (for rental cost of about $547,500 per year). In the short run, your company has 1 laboratory. The following table presents potential daily production levels with requisite input combinations.

Suppose the industry for vaccinating humans is perfectly competitive, and that all companies have production functions and cost functions that are identical to yours. Also, assume that the market price for a vaccination against biological diseases is $6,500.



Physicians Laboratories Vaccinations TC TFC TVC MC ATC AFC AVC
0 1 0
3 1 1
5 1 2
6 1 3
9 1 4
15 1 5
24 1 6
36 1 7
51 1 8

a) (7 pts) Find the profit-maximizing output level for your company. At this output level, how many physicians do you hire?







b) (4 pts) Calculate economic profits. Are these economic profits positive or negative?





c) (4 pts) What do you expect to happen to your economic profits in the long run? That is, do you expect your economic profits to persist in the long run? Explain why.





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Explanation / Answer

b)

Profit is calculated as Total revenue minus total cost. Total revenue is calculated as vaccinations multiplied by price $6500.

In the above table, the company is receiving positive economic profits all through its output.

c) No, economic profits will not persist in the long run; moreover they will become zero as in the long run the company has to sell the output at a price equal to minimum ATC. Therefore, as the price equal minimum ATC, the firm incurs zero profit and zero loss.

d) The company has to patent the product to be an exclusive supplier of the vaccine and a monopoly.

Furthermore, the company should reduce the output and sell it at a higher price than the marginal cost. For example, if the company is a monopoly than the MR and MC intersects at $6000; however, the company will sell the output at a much higher price; the price depends on the demand curve of the company, which will be downward sloping.

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