DrugCo has two demand equations for its retail products (pain reliever and cancer):Pain relief: P = 100 ? 10 QCancer drug: P = 200 ? 15 Q The marginal cost of production is $30. Which product should go to the retail market and which should go to the wholesale market? What are the corresponding retail and wholesale prices? What would happen if the sales are switched from the retail to the wholesale and vice versa?

Question

What will be an ideal response?

Answer 1

Starting with the pain relief drug, P = 100 ? 10 Q 

So, MR = 100 ? 20 Q 

Setting MC = MR, we get 30 = 100 ? 20 Q or 

20 Q = 70 

Or Q = 3.5 units and so, P = 100 ? 10 (3.5) = $65 

Now going to the cancer drug, P = 200 ? 15 Q 

So, MR = 200 ? 30 Q 

Setting MC = MR, we get 30 = 200 ? 30 Q 

Or 30 Q = 170 or Q = 5.67 units and so P = 200 ? 15(5.67) = $115 

So in the retail markets the drugs will be priced at $65 and $115 respectively. 

The wholesale drug will cost $115 to the wholesalers and the company will retail the cheaper drug to the consumers. Switching this order will allow other manufacturers to buy the cheaper drug which can be resold in the wholesale market for a much higher price but less than $65, and drive DrugCo out of business.