Answer the Following Questions

question 7

Essay

Answer the following questions.
a. A monopoly is considering spending fixed costs of $100,000 to develop in period 1 a new drug that will be sold in period 2. The demand curve in period 2 is Q = 100 - P, where Q is measured in hundreds of pills and P is the price per pill, and marginal cost is constant at $4. The drug will be granted patent protection in period 2, and there are no fixed costs of production in period 2. Will the monopoly spend $100,000 developing the drug during period 1 to sell it during period 2? If it does, what is the level of consumer surplus in period 2?
b. A monopoly is considering spending fixed costs of $100,000 to develop a new drug in period 1 that will be sold in period 2. The demand curve in period 2 is Q = 100 - P, where Q is measured in hundreds of pills and P is the price per pill, and marginal cost is constant at $4. The price of the drug will be regulated, set equal to marginal cost, in period 2, and there are no fixed costs of production in period 2. Will the monopoly spend $100,000 developing the drug in period 1 to sell it in period 2 at marginal cost? If it does, what is the level of consumer surplus in period 2?

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Definitions:

Wholesale Cost

The price charged for a product by the wholesaler, which is typically lower than the retail price.

Accounts Payable Balance

The total amount of money a company owes to its suppliers or creditors at a given point in time.

Cost Of Goods Sold

The direct costs attributable to the production of the goods sold by a company, including the material and labor costs.

Prior Quarter Sales

The total revenue generated by a business in the quarter immediately preceding the current one.