You are the manager of a company that vaccinates human beings for biological diseases. Your company uses two inputs to produce vaccinations: physicians and laboratories. However, this is a short-run analysis where physicians are variable but laboratories are fixed. Suppose that each physician costs $500 per day (for an annual salary of about $175,000) and the daily cost for the laboratory is $1,500 (for rental cost of about $547,500 per year). In the short run, your company has 1 laboratory. The following table presents potential daily production levels with requisite input combinations.
Suppose the industry for vaccinating humans is perfectly competitive, and that all companies have production functions and cost functions that are identical to yours. Also, assume that the market price for a vaccination against biological diseases is $6,500.
Physicians Laboratories Vaccinations TC TFC TVC MC ATC AFC AVC
0 1 0
3 1 1
5 1 2
6 1 3
9 1 4
15 1 5
24 1 6
36 1 7
51 1 8
a) Find the profit-maximizing output level for your company. At this output level, how many physicians do you hire?
b) Calculate economic profits. Are these economic profits positive or negative?
c) What do you expect to happen to your economic profits in the long run? That is, do you expect your economic profits to persist in the long run? Explain why.
d) What could your company do to remain a monopoly provider of this vaccination?