Suppose that a drug company produces a new drug that cures baldness. The inverse

Question

Suppose that a drug company produces a new drug that cures baldness. The inverse demand curve for the drug is P = 205 - 20 Q, where Q measures the number of pills in millions. The various costs of production are given by TC = 100 + 5Q ATC= 5 +100/Q, and MC = 5. If the government grants this firm a patent, it will earn profits of If the government revokes the patent and the firm must sell its drug at marginal cost because of competition, it will earn profits of $600 million; $500,000 $2 billion $400 million; -$100 million $70 million; -$25 million

Explanation / Answer

(C) The firms becomes a monopoly in the market and procceds as follows:

Here, P = 205 - 20Q

R = P.Q = 205Q - 20^2

MR = 205 - 40Q

Here MC = 5

Equating MR and MC we get,

5 = 205 - 40Q

=> 40Q = 200

=> Q = 5

Thus, P = 205 - 20x5 = 105

To calculate profit, we get R - C = 105X5 - (100+5X5) = 400 million

if the firm sells at MC, the P = MC,

or 5 = 205 - 20Q

=> Q = 10

Thus, profits are (5X10) - (100 + 50) = 50 - 150 = -100 Million

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