1) Recall the Application. When a patent ends and generic drugs are introduced,

Question

1) Recall the Application. When a patent ends and generic drugs are introduced, there is:

Select one: a. downward pressure on the price of the patent version of the drug. b. upward pressure on the price of the patent version of the drug. Incorrect c. no pressure on the price of the patent version of the drug. d. no demand for the patent version of the drug.

2) Suppose that a price discriminating monopolist is able to divide its market into two groups. If the firm sells its product for $25 to the group whose customers have the least elastic demand, what price are they likely to charge to the group whose customers have the most elastic demand?

Select one: a. $25 b. more than $25 Incorrect c. less than $25 d. The answer depends on the marginal revenue for that group.

3) Recall the Application. Suppose a low demander is willing to pay $8 for a movie, while a high demander is willing to pay $12 for a movie and popcorn. The theater could charge ________ for admission and ________ for popcorn for each consumer to receive a consumer surplus of $2.

Select one: a. $8; $2 Incorrect b. $10; $0 c. $6; $4 d. $9; $3

4) When a local casino spends millions in TV ads convincing town residents to reject another casino's bid to operate in the area, the most that the casino would be willing to spend is:

Select one: a. the producer surplus gained by being a monopoly. b. the consumer surplus gained by being a monopoly. Incorrect c. deadweight loss. d. total economic surplus.

5) Suppose that it would cost a firm $9 million to develop a new drug. In the absence of a patent, other firms will be able to copy and bring to market a generic equivalent of the drug in three years. In each of these three years, the firm would earn monopoly profits of $4 million. A patent will generate monopoly status for the firm for twenty years. If the government knew this information ahead of time, which of the following is most correct?

Select one: a. The government should grant a patent to the firm, because the firm would not produce the drug at all without a patent. b. The government should grant a patent to the firm, because it does not have the resources to determine on a case-by-case basis exactly which inventions merit award of the patent. Incorrect c. The government should grant a patent to the firm, because even with a patent the firm will not earn a monopoly profits. d. The government should not grant a patent to the firm, because the firm would earn sufficient profits to develop the drug without the patent.

Explanation / Answer

1. A

downward pressure on the price of the patent version of the drug as generic version are cheaper than branded version.

2. C

In discriminating monopolistic market, when elasticity of demand curve is elastic it means consumers are price sensitive. As a result firm charges them lower price compared to inelastic consumers.

3. C.

CS for low demander=WTP-Price paying=8-6=2

CS for 2nd consumer= 12-10=2

4.

A

5.

d. The government should not grant a patent to the firm, because the firm would earn sufficient profits to develop the drug without the patent. As without patent also firm is making a monopoly profit, so it will be beneficial for firm to invest in R&D.

Cost=9

Monopoly Profit=4*3=12

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