Worksheet – Unit 5

 Demand and Costs for Acme Corp. Quantity (millions of units) Total Costs (\$million) IF Acme is in price competition: IF Acme is a monopoly: Price (\$) Total Revenue (\$million) Total Profit (\$million) Price (\$) Total Revenue (\$million) Total Profit (\$million) 1 20 17 36 2 32 17 32 3 50 17 28 4 80 17 24 5 120 17 20

Acme Corporation a large pharmaceutical drug corporation.  It currently has a patent on a particular drug.  The patent means Acme is currently a monopolist (regarding this product).  This means it faces the same decisions any monopolist faces:  how much to produce and what price to charge in order to maximize profits, given what market demand is.  In the table above, the last 3 columns represent the price, total revenue, and total profit as a monopolist.  You should complete the calculation of total revenue and total profit for each level of sales (quantity) at the price that could be charged as a monopolist.

Acme faces a challenge however.  A proposal exists in Congress that would force Acme to license the patent to a competitor.  The rationale in Congress is that Acme is charging too much as a monopolist, that the research that originally produced the patent for Acme was largely subsidized by the US Dept of Health and Human Services, and that Acme has long ago recouped any investment costs in research that produced the patent. Therefore some members of Congress have proposed to bring competition to the drug market in order to reduce healthcare costs for all.  If the proposal succeeds in Congress, Acme will face a new competitor that has indicated it can and will be able to sell the same drug at a price of \$17.  Therefore columns 3, 4, and 5 above represent what would happen to Acme if it faced some price competition.  You should complete the total revenue and total profit columns for Acme if it faces price competition.

Directions:  After calculating the empty columns, you should then decide what would be the profit-maximizing quantity to produce if Acme (a) remains a monopoly and (b) faces price competition.  Then answer the questions about this worksheet in your school’s learning management system. (Moodlerooms at HFCC).