Imagine a society swept by a debilitating, contagious disease that torments its
ID: 1240527 • Letter: I
Question
Imagine a society swept by a debilitating, contagious disease that torments its victims for decades before finally killing them. This society's only pharmaceutical firm develops a drug that will cure the disease. The firm wants to maximize its profit. The marginal cost of producing the drug is low, $1.00 per dose.What price is the firm likely to set?
Suppose some disease sufferers are wealthy and others are poor. All can afford $1.00 per dose but the poor cannot afford to pay more than $1.00 per dose. Is the monopoly operating in the social interest?
Imagine that many new firms enter the market by discovering and producing drugs that cure the same disease. How does this difference change the original situation?
Explanation / Answer
1. The firm is likely to set the price at more than $1.00 to ensure the maximization of profit, since the cost of production is $1.00. However, how much above $1.00 depends on what the population can afford. If everyone can afford above $1.00, then the price would be set at above $1.00 because this ensures a profit over cost from every single customer possible. If not everyone can afford $1.00, the amount sold to those who can afford over $1.00 must exceed what the company would make if it sold it to everyone at a price they could all afford. If it sold it to only 10 people, the amount sold to those 10 people would have to go above the cost of production, and what the company would make if it only sold the drug at $1.00 to everyone. This would ensure maximization of profit. 2. If by social interest it is meant access to medicines for everyone, then yes, because everyone can afford to pay $1.00 per dose, and that amount sold is the maximum profit the company can make if it sells to everyone at $1.00. 3. If new firms can produce a drug to cure the same disease, the original company is in competition with it. This means that it must adjust its price to stay competitive. Accordingly, it might lower its price of the drug, or sell it to people at the same price. However, if the original company sells the drug at the same price as the new company, it must be careful to ensure that doing so means that the amount sold outweighs the profits made by only selling to everyone at $1.00 if everyone can afford the drug at $1.00 or at whatever price every single customer can afford. This maximizes profits in the face of competition.