Suppose a drug company has a patent on acancer drug that allows it to enjoymonopolistic rents for the life of the patent.The patent is set to expire in one year. Atthat point all drug companies will haveaccess to the patent and be able to producegeneric versions of the cancer drug,transforming the market for this drug in aperfectly competitive market. Suppose themarket demand for the cancer drug beforeand after the patent expires is unchangedand given by p = 120 - 0.3Q. Suppose thatall firms (the monopolist as well as thegeneric drug firms) face the sameproduction cost C(Q) = 100 + 0.3Q + 0.2Q2.Question: Calculate the gain in total surplusthat results when the market for the cancerdrug switches from a monopolistic marketto a perfectly competitive market.

Answer: Demand function: p=120-0.3Q Cost function: CQ=100+0.3Q+0.2Q2 When the market switches from…

Answered: Suppose a drug company has a patent on…

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter14: Monopoly

Section: Chapter Questions

Problem 14.2P

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Suppose a monopoly market has a demand function in whichquantity demanded depends not only on market price (P) butalso on the amount of advertising the firm does (A, measuredin dollars). The specific form of this function isQ =(20 - P2) (1 + 0.1A - 0.01A2).The monopolistic firm’s cost function is given byC = 10Q + 15 + A.a. Suppose there is no advertising (A = 0). What outputwill the profit-maximizing firm choose? What market price will this yield? What will be the monopoly’sprofits?b. Now let the firm also choose its optimal level of advertising expenditure. In this situation, what output levelwill be chosen? What price will this yield? What will thelevel of advertising be? What are the firm’s profits in thiscase? Hint: This can be worked out most easily by assuming the monopoly chooses the profit-maximizing pricerather than quantity.
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