CALCULATE the optimum (profit-maximizing) selling price for Rifmn and the resulting annual profit which Suraj Pharma will make from charging this…

Demand function b = change in price/change in quantity b = 4/8,000 units = 0.0005 The maximum demand for Rifmn is 10,00,000 units, so where P = 0, Q = 10,00,000, so 'a' is established by substituting these values for P and Q into the demand function: 0 = a - (0.0005 × 10,00,000) 0 = a - 500 Therefore, a = 500 Demand function is therefore: P = 500 – 0.0005Q Marginal cost Total ₹ Salt X 367.50g × ₹ 0.08 29.40 Salt Y 301.50g × ₹ 0.40 120.60 Labour Given in ques 38.60 Machine running cost (30/60 × ₹ 40.00) 20 Total marginal cost per batch 208.60 Marginal Revenue Function: MR = a – 2bQ Equate MC and MR and insert the values for 'a' and 'b' from the demand function in step 1 ⇒ 208.60 = 500 – (2 × 0.0005 × Q) Solve the MR function (to determine optimum quantity, Q) ⇒ 208.60 = 500 – 0.001Q ⇒ 0.001Q = 291.4 ⇒ Q = 291,400 batches Calculate the optimum price ⇒ P = 500 - (0.0005 × 291,400) ⇒ P = 354.30 Calculate Profit Particulars ₹ Revenue (2,91,400 batches × 354.3) 10,32,43,020 Less: Variable costs (2,91,400 batches × ₹ 208.60) 6,07,86,040 Less: Fixed costs (3,00,000 batches × ₹ 35) 1,05,00,000 Profit 3,19,56,980 Recommended Pring Strategy Firms often use different pricing strategies when their products are first launched into the market. The most two common approaches are price skimming and penetration pricing. In penetration pricing, low price is charged initially, thought behind this is that low price will make the product accessible to large number of buyers, so high sales will compensate the low price being charged getting the benefits of economy of scale. This approach works best when customers are price sensitive, R & D and marketing expenses are low, or when competitors will quickly enter the market. In this case, medicines are highly inelastic in nature so any reduction in price will not increase the demand of the drug, which clearly indicates that market penetration pricing will not help. Skimming Pricing refers to charging high price initially than lower the prices. High price in the early stage of the product's life cycle is expected to generate high initial cash flows, which will help the company to recover high development cost. This would enable the company to take advantage of unique nature of the product. In present case, the unique nature of drug, entry barrier (since company has taken patent) requires huge initial investment and considering this market skimming pricing strategy would be more favorable pricing strategy. However, this strategy only works as long as drug is protected by patent. In addition, a drug firm is required to consider the expected reactions from national price controllers who in turn may be influenced by political factors and public opinion. Practical Insight Most of the people in developing countries buy medicines through out-of-pocket payments, high prices of medicines might force people to forego treatment or go into debt. As a result, the price of the medicines may be regulated by the health organizations/ agencies.