Assume the graph below represents the overall market demand for a patented presc
ID: 1104962 • 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.)
What do you predict will happen to the structure of competition and to the price in this market when the patent expires? (Hint: use the concept of "Minimum efficient scale " of production in your answer.)
SP per presrip -tion 100-_ MC 60 ATC ATC Si 20 scripts week (1000's) 100 300 500 700Explanation / Answer
Expiry of patent will not affect the firm's cost curves but will reduce the demand faced. This is because after expiry of patent, other competitors will start using the patented technology and hence start selling the improvised or advanced product, thereby splitting demand among all competitors.
The demand curve thus shifts downwards, leading to a fall in both profit maximizing price and output of the firm.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.