Microeconomics Assignment: Analysis of Pricing, Costs, and Break-Even

This microeconomics assignment delves into the pricing strategies and break-even analysis of two distinct scenarios. The first case examines Prescott Pharmaceuticals, evaluating the financial viability of producing generic drugs (Duloxetine) after the loss of patent rights. The analysis considers sunk costs, production costs, and potential sales to determine the optimal course of action. The second case focuses on ShorTech, a mobile phone manufacturer, and its pricing decisions in a competitive market. The assignment explores the impact of new market entrants on pricing, utilizing the concept of price elasticity to determine the optimal price point for the Quadrant mobile phone. Both cases provide practical applications of microeconomic principles, including cost analysis, pricing strategies, and market competition, offering valuable insights into business decision-making.

Running head: MICROECONOMICS
Microeconomics
Name of the Student
Name of the University
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Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................2
Reference.........................................................................................................................................4

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Answer 1
Prescott Pharmaceuticals manufactures generic drugs. With loss of patent right of
Cymbalta, which is also known as Duloxetine, Prescott Pharmaceuticals invested in certification
and FDA approval. The investment made for FDA approval is $ 500, 000 and the cost of
certification for production lines is $ 100, 000. It evident from the given information that $ 2,
000, 000 is the cost of production. It is given that the marginal cost for each table is $ 0.10. Due
to loss of patent right new firms have entered the market and thus it is estimated that the sales of
Prescott will fall. The forecasted sales of Prescott is 5 million tablets. The selling price per tablet
is $ 0.40. The company should at least breakeven to recover its cost per unit. Breakeven can be
given as
Breakeven price= Average ¿ cost+ Average variable cost
¿ , Breakeven price= [ 2000000+ ( 0.10 ×5000000 ) ]
5000000
¿ , Breakeven price=0.41
The cost of FDA approval and certification are sunk costs and hence they are not included in the
calculation of breakeven price (Clark & Wrigley, 2017). The breakeven price is $ 0.41 per unit.
The breakeven price per unit is higher than the per unit selling price of the generic drug
by $ 0.01 per unit (Kampf, Majerčák & Švagr, 2016). Therefore, by continuing selling of the
drug the Prescott would make loss. Hence, Prescott should discontinue selling of the product.
Answer 2
ShorTech after introduction of its Quadrant mobile phone and priced it at $ 500 per unit.
It is given that $ 350 is cost of production per unit. As per the hired economic consultant,

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ShorTech is charging the optimal price (Güler, Akan & Sevim, 2017). However, after the entry
of new mobile phone manufacturing companies in the industry customers became more
conscious as per the economics consultant the ShorTech should the charge new price to compete
the in the market. The cost of per unit production of mobile phone has reduced to $ 300. The
current price elasticity of the product is -4. Therefore new optimal price ShorTech should charge
is
Price ( P ) =Elasticity of demand ×( Price−Marginal cost)
¿ , P=4 ×( P−300)\ ¿ , P=4 P−12 00
¿ , 3 P=1200
¿ , P=$ 400
Therefore, ShorTech should charge $ 400 per unit and is the current optimal price.
Therefore, it can be seen that with entry of new firms in the market the optimal price of per unit
of Quadrant mobile phone has reduced to $400 per unit.

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Reference
Clark, G. L., & Wrigley, N. (2017). Sunk costs: a framework for economic geography.
In Economy (pp. 241-260). Routledge.
Güler, M. G., Akan, M., & Sevim, İ. (2017). Optimal pricing policy with inventory related costs
and reference effects.
Kampf, R., Majerčák, P., & Švagr, P. (2016). Application of break-even point analysis. NAŠE
MORE: znanstveno-stručni časopis za more i pomorstvo, 63(3 Special Issue), 126-128.