Question

3. A pharmaceutical company acquired a 10 year drug patent, making the company a monopolist in the corresponding market for this period. Suppose the marginal cost of producing the drug is zero and the demand curve has a downward slope and a positive intercept. a) Plot the demand, marginal revenue and the marginal cost curves and show the quantity produced by the monopolist. (b) Suppose after the patent runs out, new firms enter the market for this particular drug and the new market outcome is the same as under perfect competition. Show on the graph the new quantity produced. (c) What is the change in consumer surplus when moving from the monopoly setting in (1) to the perfect competition setting in (2)? What is the change in producer surplus? Can the increase in consumer surplus when moving from monopoly to perfect competition compensate the corresponding decrease in the producer surplus?

Answer 1

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