Suppose That It Would Cost a Firm $10 Million to Develop

question 156

Multiple Choice

Suppose that it would cost a firm $10 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 $3 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?

• A)The government should not grant a patent to the firm, because the firm would earn monopoly profits for three years even without the patent.
• B)The government should not grant a patent to the firm, because monopoly leads to efficiency losses relative to the competitive market.
• 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 grant a patent to the firm, because the firm would not produce the drug at all without a patent.

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Definitions:

Real Rate

The interest rate adjusted for inflation, representing the true cost of borrowing or the true return on investment.

Variance

A statistical measurement of the dispersion of a set of values, indicating how much the numbers in the set deviate from the mean or average of the set.

Deviations

Statistical variances or differences from a central value, such as the mean, indicating how spread out data points are.

Mean

A statistical measure of central tendency, commonly understood as the average value of a set of numbers.