1. The Federal Drug Administration grants a monopoly to the producers of certain
ID: 1187248 • Letter: 1
Question
1. The Federal Drug Administration grants a monopoly to the producers of certain pharmaceuticals by preventing other drug companies from producing the same name-brand drug. What effect does this have on the equilibrium price and quantity of name-brand drugs? Give one argument in favor of increased competition in the drug industry. Give one argument against increased competition in the drug industry.
2. True or false: A profit-maximizing business should produce output that minimizes cost per unit produced. Explain.
3. For the firm depicted below (graph), is the firm earning a profit or incurring a loss? What is the dollar amount of the profit or loss?
4. Maria is a monopolist. She faces a typical downward-sloping demand curve. In the short-run, Maria faces increasing marginal costs due to diminishing returns. Draw the set of graphs that depict Maria's profit-maximizing quantity and price. Suppose Maria is earning abnormal profit in the short run. Draw an average cost curve that depicts this situation. (You can submit the graph separately if you wish to draw it by hand)
5. Suppose Maria's industry were instead perfectly competitive. What would the equilibrium (and profit maximizing) quantity and price be in that case?
Explanation / Answer
ANSWER 1= Effect on equilibrium price & quantity - artificial constraint on supply, thus---? increasing price. 2. social / moral argument - everyone should have healthcare/treatment availability; economic - competition increases supply, thus lowering price in marketplace. 3. increasing competition leads to cost-cutting measures possibly endangering quality of pharmaceuticals (drugs and meds) and also reduces amount of funds available to research new drugs and treatments. puts manufacturers of drugs at risk of going out-of-business if unable to recover their R&D costs and manufacturing costs (return on investment). 2=FALSE
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