DermaPlus
You’re BioMed’s resident economic expert. Harry the CEO is asking you to complete a time‐sensitive project that another person, Selwyn, had started working on before he retired.
Harry explains that BioMed has a manufacturing plant that produces a prescription topical cream called DermaPlus™, which is used for treating certain skin conditions. Hospitals and pharmacies are the main buyers of DermaPlus™.
A number of other firms produce creams that are almost identical to DermaPlus™ and the market for these creams is extremely competitive. In fact, BioMed’s current share of the market for this type of topical cream is small, so it has no ability to influence the market price. On the other hand, because Biomed is relatively small compared to the size of the market, it can sell as much of the cream as it likes at the prevailing market price.
The plant producing DermaPlus™ has been operating for a little over three years with the same manufacturing equipment. Currently there are no plans for upgrading or adding to this equipment.
Over the last three years, the price of DermaPlus™ and related creams has been quite volatile and
BioMed has tried to react to the changing price by varying its output level to constantly maximize its monthly profit. To date, BioMed has been able to vary monthly production quite easily by taking advantage of a flexible, non‐union workforce with a large number of part‐time workers. However, the workforce at the DermaPlus™ plant is just about to be unionized. Once that happens, it will become much more difficult to vary the amount of labour used in the short run and therefore much more difficult to vary the monthly production of DermaPlus™.
Before he left, Selwyn had been asked to estimate the short‐run cost functions for the DermaPlus™ manufacturing plant. The goal was to use this information to determine the profit‐maximizing output level and use that information to estimate the optimal size for the new unionized
Harry explains that BioMed has a manufacturing plant that produces a prescription topical cream called DermaPlus™, which is used for treating certain skin conditions. Hospitals and pharmacies are the main buyers of DermaPlus™.
A number of other firms produce creams that are almost identical to DermaPlus™ and the market for these creams is extremely competitive. In fact, BioMed’s current share of the market for this type of topical cream is small, so it has no ability to influence the market price. On the other hand, because Biomed is relatively small compared to the size of the market, it can sell as much of the cream as it likes at the prevailing market price.
The plant producing DermaPlus™ has been operating for a little over three years with the same manufacturing equipment. Currently there are no plans for upgrading or adding to this equipment.
Over the last three years, the price of DermaPlus™ and related creams has been quite volatile and
BioMed has tried to react to the changing price by varying its output level to constantly maximize its monthly profit. To date, BioMed has been able to vary monthly production quite easily by taking advantage of a flexible, non‐union workforce with a large number of part‐time workers. However, the workforce at the DermaPlus™ plant is just about to be unionized. Once that happens, it will become much more difficult to vary the amount of labour used in the short run and therefore much more difficult to vary the monthly production of DermaPlus™.
Before he left, Selwyn had been asked to estimate the short‐run cost functions for the DermaPlus™ manufacturing plant. The goal was to use this information to determine the profit‐maximizing output level and use that information to estimate the optimal size for the new unionized