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

question 52

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:

Demand for Labor

The demand for labor reflects the amount of labor employers are willing to hire at a given wage rate, influenced by economic conditions and productivity.

Public Goods

Goods that are non-excludable and non-rivalrous, meaning that no one can be effectively excluded from use and where use by one individual does not reduce availability to others.

Marginal Product

The increase in output that is produced by adding one more unit of a particular input while holding all other inputs constant.

Total Output

The complete amount of goods or services produced by an economy, sector, or organization over a certain period.