Question

1. Sharpe Pharmaceuticals has developed a new drug called Zantor that can cure anxiety disorders. Sharpe Pharmaceuticals has a patent on the production of Zantor. Suppose the demand Zantor is given by the equation P=86-1/3000Q and the marginal revenue is given by the equation MR=86-1/1500Q. Further suppose that the marginal cost of producing Zantor is MC=6 and the average total cost is given by the formula: ATC=100,000/Q+6
   1. (4 points) Calculate the profit-maximizing price and quantity.
2. 2. (4 points) How much profit does Sharpe Pharmaceuticals earn?

c. (8 points) One policy option to combat rising pharmaceutical prices is to have the government step in and regulate prices. Two options discussed in lecture were to force P=ATC and to force P=MC. Why might these problematic? You should discuss at least two possible problems.

d. (3 points) What would you expect to happen to the market for Zantor once the patent expires? Why?

Answer 1

A) MR=MC

86-q/1500=6

Q=80*1500=120,000

P=86-120,000/3000=86-40=46

B) AC=100,000/120,000)+6=0.8333=6.833

Profit=(46-6)*120,000-100,000=4800,000-100,000=4700,000

C) Because firm has patent for zantor. So it can charge as it wants.so goverment can't regulate till patent expire.

If this happen, possibly firm will reduce its supply of zantor,which make people to willingly pay higher ,so goverment regulation wouldn't be stable.

D)As patent expires ,new firms will enter the market.

And competition will lead to decrease in price automatically.