4. A pharmaceutical ?rm is marketing a patented drug it has developed (the ?rm t

Question

4. A pharmaceutical ?rm is marketing a patented drug it has developed (the ?rm therefore has monopoly rights over the drug). The demand for the drug is given by Q = 8000 ?? 8P (MR(Q) = 1000 ?? Q 4 ), where P is the price of the drug (in cents), and the total cost of production is TC(Q) = Q2 + 100Q + 10000 (MC(Q) = 2Q + 100). a. Calculate the (monopoly) price of the drug, PM, and the quantity sold, QM. b. Suppose now that the drug?s patent expires, and other pharmaceutical ?rms can begin producing it. Assume this result in a competitive supply of the drug, and calculate the long-run competitive equilibrium price and aggregate quantity. Compare these to those you found in part a. c. Using a diagram, compare the consumer surplus between parts (a) and (b). In which case is the consumer surplus higher? Why do you think the patent would have been granted in the ?rst place?

Explanation / Answer

a)Given, MR = 1000 - Q/4

MC = 2Q + 100

For, maximisation of profit, MR = MC

Therefore, 1000 - Q/4 = 2Q + 100

Q = 400 units

P = 950 $

Profit = 3,80,000 - 2,10,000 = 1,7,000 $

b) Not sure about this question

sorry

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