You work for a drug company with a patent on a product called Hair Grow, the world's first drug that restores hair. You have been charged by the CEO to review the pricing and investment decisions for this product. The demand curve for Hair Grow has been estimated to be:
P = 52 - .00002Q
a. Your marginal cost to produce a unit of Hair Grow is $2. This marginal cost is the only cost associated with the product.
What are the profit-maximizing price and quantity? What is your profit?
b. Suppose your production facility currently has a limit of 1,000,000 pills. What are your optimal price and quantity?
c. Suppose you can increase your production capacity to 2,000,000 pills within the next two years for an investment of $20,000,000. Should you undertake the investment? (Assume your borrowing costs are basically zero at the present time) What factors should you consider in making oyur investment decision?