In United States, the price at which Aveta can maximize the profits is $12 and at this price, the company can maximize its profits. With the price of Tanziclor at $ 12, the cost and revenue on the product look like:
The profit earned is maximum, at the level of prices where the marginal cost equals the marginal revenue. In this case, the marginal cost of $ 2 is equal to marginal revenue. The price at $ 12 is within the range of $ 2 to 15.
The same calculations can be repeated for arriving at the price for Europe where the company can maximize the profits. This price is arrived at $ 8 per unit. The calculations done in the profit calculator are shown in the following table.
For Europe at the demand elasticity level of -1.6 the marginal cost of $ 3 is equal to the marginal revenue of $ 3. At this level, the company can maximize the profit from the European market. It is also seen that the price of $ 8 is within the range of $ 2 to 15.
Lerner Index measures the market power of monopoly. It is arrived at using the equation 1 = (price-marginal cost) / price. The index can lie anywhere between zero and one. When the index is 1 it can be assumed that the monopoly power is maximum and when the index lies at 0 there is no monopoly power of the market exists. Therefore, in the case of perfect competition when the price of the product is equal to its marginal cost the Lerner index will exhibit a zero value. As far as Tanziclor is concerned, there is a difference in the Lerner index for the United States and European markets and hence the monopoly power differs in both the markets for the same product. It can be seen that there is a difference in the elasticity. It is -1.2 in the case of United States and -1.6 in the case of European. Therefore, it can be reported that there is less monopoly power attributed to Tanziclor in the European market.
It is also observed that there are different prices worked out for both United States and European markets. There are reasons for the price difference:
- The fixed costs incurred for the product are different in both the markets and the fixed costs have a definite impact the total production costs. The fixed costs for European market at $ 5,000 are lower than $ 8,000 for US market.
- The marginal costs are also found to be different at $ 2 for US and high at $ 3 for Europe market. The cost levels therefore are different at both the markets.
- There are different price elasticity operating in the US and European markets (-1.2 for US market and -1.6 for the European market). This is one of the main reasons for different prices to be charged for the two markets.
In order to maximize the profit in both the markets, it is necessary to make the marginal revenue equal to the marginal cost. This makes the profit maximizing output to be different in respect of the US and European markets.
According to Brendan the company can maximize the profit by charging a price that is above the marginal cost both in the US and European markets. However, the suggestion given by Brendan is unworkable as there are other costs involved in the manufacture of the product. Brendan has not considered the fixed cost element and the fixed costs are varying in both the markets. The price sensitivity is another point that needs consideration, which Brendan omitted in offering his suggestion. Moreover, as a basic rule the profits of the company will be maximized only when the marginal cost equals to marginal revenue. Brendan has not considered this fact.
Jason’s suggestion is also unworkable, as he has considered only fixed costs. He has ignored the impact of marginal costs. It is necessary that both the marginal cost and fixed costs need to be considered while arriving at pricing decisions. In addition, Jason has not considered the price elasticity of demand applicable to both the markets. For maximizing the profits of the company in both the markets, marginal costs need to be equated to marginal revenue and the price at that level of output will work to maximize the profit. Jason failed to consider marginal costs and elasticity of demand whereas Brendan omitted to take the fixed costs and elasticity of demand in the two markets into consideration.