Question

1) A firm is considering buying a patent that would give it a monopoly over sale of a new drug. If it buys the patent, the demand curve is it would face for its product is P = 10 – q, and it would have zero marginal costs of production and no other fixed costs. If the firm anticipates setting a single price to all consumers, what is the most that it would be willing to pay for the patent?

2) A firm is considering buying a patent that would give it a monopoly over sale of a new drug. If it buys the patent, the monopolist’s demand curve would be P = 10 – q, and it would have zero marginal costs of production and no other fixed costs. The firm also anticipates that the government will regulate the market in the following way: the government will set a maximum price of $4 per unit. In addition, the government will provide a subsidy to the monopolist equal to the increase in consumer surplus between the outcome in which the monopolist sets its profit-maximising price and in the market with the government price regulation. What is the maximum the monopolist is will be willing to pay for the patent?

Answer 1

Let us first define the the technical concepts:

1. Marginal Cost (MC): MC is defined as the additional to or subtraction from the total cost resulting to increased or decreased production by one or more unit.

2. fixed costs (FC): FC are incurred on fixed factors of production like machines, buildings and they cannot be changed during short run period

now, if the company buys the patent, it is thinking about the long run profits and costs.

demand curve is: P = 10-Q(d).

now let us assume the firm sets price of $5 per unit, so the supply curve will be: P= 5+Q(s)

to attain equilibrium, the firm must attain demand = supply

so P = 10-Q(d)

and P = 5+Q(s)

10-Q(d) = 5+Q(s)

if Q(d) = Q(s)

10-Q = 5+Q

10-5 = Q+Q

5 = 2Q

2.5= Q

we know P = 10-Q(d)

P = 10-2.5

P = 7.5

so, he should be willing to pay 7.5 per 2.5 units if the price is $5