Assume the graph below represents the overall market demand for a patented presc
ID: 1104961 • Letter: A
Question
Assume the graph below represents the overall market demand for a patented prescription drug together with the firm-level marginal cost and average cost functions for producing the drug. Assume these cost curves do not reflect R&D costs of developing this drug, but only reflect production costs of the drug once the formula for it is known. (Note: the diagram assumes that in the output range from 250-400 thousand MC =ATC = $20). Rising MC at Q>400,000 increases ATC.)
If there were no patent to prevent entry, what would the “efficient” overall market level of output of this prescription drug be?
SP per presrip -tion 100-_ MC 60 ATC ATC Si 20 scripts week (1000's) 100 300 500 700Explanation / Answer
If there were no patent to prevent entry then this prescription drug market will operate like a perfectly competitive market.
Perfectly competitive market results in production of efficient level of output.
This efficient level of output is that level of output corresponding to which MC curve intersects demand curve.
The given figure shows that MC curve intersects demand curve corresponding to 550,000 scripts per week.
So, the "efficient" overall market level of output of this prescription drug would be 550,000 scripts per week.
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