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:

Two-Part Tariffs

A pricing strategy that consists of a fixed fee plus a variable usage fee.

Supply Chain

The entire system of producing and delivering a product or service, from the supplier of raw materials to the customer.

Chain Profits

The overall financial gains generated through the interconnected stages of a supply chain.

Forward Buy

The purchasing strategy of a product in larger quantities when it is priced lower, to use or sell over time as prices increase.