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BigMed, a profit-maximizing firm, has a patent on a medical device, making it the only producer of that device. The graph above shows BigMed's demand , marginal revenue , average total cost , average variable cost, and marginal cost curves
(a) Calculate BigMed's total revenue if the firm produces the allocatively efficient quantity . Show your work
(b) Starting at a price of $100, if Big Med were to increase the price by 2%, will the quantity demanded decrease by more than 2%, by less than 2%, or by exactly 2%? Explain
(c) At a quantity of 10 units, is BigMed's marginal product increasing , decreasing , or constant ? Explain
(d) Identify the quantity that maximizes BigMed's profit. Explain. (e) At the quantity identified in part (d ), does BigMed earn a positive economic profit , a negative economic profit , or zero economic profit ? Explain.

Answer 1

Bigmed's total revenue if the firm produces allocative efficient quantity will equal $5,700.

What is Allocative Efficient Quantity?

Allocative efficiency in economics is triggered when price = marginal cost. The point on the graph where this happens is the point where price equals $100 and quantity = 57.

Because revenue is price x quantity, we therefore have:

$100 * 57 = $ 5,700.

Hence A = $ 5,700

B) With a change in the price of 2% the quantity demanded will most likely remain at 57 or very close to 57 because in that region, the price is inelastic.

This can be proven by calculating the demand reaction when the price moved from $68 to $100. The price elasticity for that change in price was -0.78 (that is, inelastic).

So if for a price change of 32% the quantity changed was negligible, then 2% will be more inelastic.

C) At the quantity demanded of 10 units, there is insufficient information to determine the condition of the marginal product.

D) Profit is always maximized at the point where Marginal Cost (MC) = Marginal Revenue (MR). That is MC = MR.

Hence the quantity (Q) that maximizes BigMed's profit is 44 Units.

E) At the quantity identified above, the firm is earning negative economic profits which is a loss. This is because of the price where MC=MR is lower than the Average Total Cost (ATC).

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