Question

2. Consider a different case. Suppose that the current marginal cost per unit of a vaccine equals $100. Suppose further that the producer of the vaccine holds a patent on it; and as a result, charges consumers of the vaccine a monopoly price that is 25% above the marginal cost of production. Now suppose that publicly-funded drug research is undertaken which lowers the marginal cost per unit of vaccine from $100 to $60. Assume that producers respond by charging a market price for the drug equal to $60 plus their monopoly mark-up of 25%. $125 --- -- MC. + Monopoly Premium $100 MCO $75 ---- MC+ Monopoly Premium MC; 100 200 Millions of Units (a) Use Figure 2 to fill in the Table below. Do not use the numbers to do so. Instead, work with the various areas designated by the letters. Consumers Producers Society Pre-Research Post-Research Net Change (b) Now, discuss how you would use the information about costs, prices, and quantities in Figure 2 to estimate the social benefits of the research.

Answer 1

Answer:

The table with the details is given below:

	Consumers	Producers	Society
Pre-research	A	BC	ABC
Post-research	ABCDE	GH	ABCDEGH
net change	+BCDE	-BC, +GH	+DEGH

Research leads to a net benefit of DEGH in the above graph. Due to research and the resulting technological advancement, marginal cost decreases, due to which producers' welfare increases. Price also decreases which favors the consumers. Now more quantities are available to them at lower price. Thus research benefits both consumers and producers, thereby the society.