Question

1. The table below represents the demand curve for a cancer treatment drug in the fictional country of Frobia .   Frobia is a small, low-income country with no public health care system.   Few people are covered by insurance. The price is for a bottle that contains a one-month supply of the drug. Assume that one drug company, BigPharma, has a patent on this drug, and there are no close substitutes. BigPharma is the sole legal provider of this drug in Frobia. Use this information to answer the following questions.

Quantity Demanded	Price	Revenue	Marginal Revenue
1	$500
2	$400
3	$300
4	$240
5	$200
6	$150
7	$100
8	$60
9	$28
10	$2

1. Complete the information about revenue and marginal revenue in the table above.
2. If BigPharma has a constant marginal cost of production of $20 per bottle, how many will they sell and what price will they charge?
3. From the information given, can you tell if they are making a positive profit at your choice of P and Q in part b)? Why or why not?
4. Now imagine this was a perfectly competitive market with many suppliers of a generic version of the drug. The following table gives the market supply.

Quantity Supplied	Price
1	$20
2	$20
3	$20
4	$20
5	$20
6	$20
7	$20
8	$20
9	$20
10	$20

Assume the market reaches the competitive market equilibrium, what will be the price and quantity produced and sold?

5. Compare the welfare of people with this type of cancer in this country under a monopoly versus perfect competition drug market. Be specific to this example.
6. Is there any mitigating factor that we failed to consider in part e)?

Answer 1

A.

Quantity Demanded	Price ($)	Revenue ($)	Marginal Revenue ($)
1	500	500
2	400	800	300
3	300	900	100
4	240	960	60
5	200	1000	40
6	150	900	-100
7	100	700	-200
8	60	480	-220
9	28	252	-228
10	2	20	-232

B.

They will sell 5 units , because afterwards, MC will be more than the MR. So, 5 units will be the profit maximizing output.

Price = $200 per unit.

C.

The firm is making a positive profit, because Price is more than the MC and in the short run.

D.

The price = $20 as MR = MC

Total output = 10 units

as there is a constant marginal cost of $20.

E.

In monopoly, there was less output and high price, but in perfect competition, there was higher output and low price. Hence, welfare was more with the perfect competition. With monopoly, there was dead weight loss and market inefficiencies.

F.

It is the government regulation that will be applied in monopoly market. It will mitigate the harsh market conditions and welfare level will increase.