Suppose a pharmaceutical firm is considering whether to invest
in a new drug and it estimates that the annual demand for the drug
is given by Q = 1, 000, 000 − 500p. It knows that once the drug is
patented, the unit cost of production will be $10.
a. What is the maximum variable profit it expects to make annually? What price will it set and the quantity it will sell annually.
b. If the life of the patent is 10 years, what is the maximum amount the firm will consider investing inclusive of all R&D costs and fixed costs?
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