Suppose That It Would Cost a Firm $9 Million to Develop

question 101

Multiple Choice

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?

• 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.
• 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.

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Definitions:

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