Costs of Regulation
Hathaway-Ross Instruments, Inc., manufactures an innovative piece of diagnostic equipment used in medical laboratories and hospitals. OSHA has determined that additional safety precautions are necessary to bring radioactive leakage occurring during use of this equipment down to ascceptable levels. Total and marginal production costs, including a nor- mal rate of return on investment but before additional safeguards are installed, are as follows:
TC = $5,000,000 + $5,000Q MC = DTC/DQ = $5,000
Market demand and marginal revenue relations are the following:
PL = $15,000 - $12.5QL (Medical Laboratory Demand)
MRL = DTR/DQL = $15,000 - $25QL
PH = $10,000 - $1QH (Hospital Demand)
MRH = DTR/DQH = $10,000 - $2QH
A. Assuming that the company faces two distinct markets, calculate the profit-maximizing price/output combination in each market and economic profits.
B. Describe the short- and long-run implications of meeting OSHA standards if doing so raises marginal cost by $1,000 per machine.
C. Calculate the point price elasticity at the initial (part A) profit-maximizing activity level in each market. Are the differential effects on sales in each market that were seen in part B typical or atypical?