Question

Gilead sells a patented drug called Sovaldi that treats Hepatitis C. A course of treatment costs more than $84,000 for each patient and the company sets the price at $1,000 a pill. A report from the Senate Finance Committee said that Gilead was “focused on maximizing revenue . . . even though the company’s own analysis showed a lower price would allow more patients to be treated.” Gilead is the only company that makes these drugs.

Suppose that the monopolist Gilead faces the demand curve Q = 10,000 – 100P and that it can provide the drug at a constant marginal cost of $1 per pill.

1. How many pills will it sell?
2. What will be the market price for each pill?
3. Suppose, by contrast, Gilead operates in a perfectly competitive market, what would be the price for each pill?
4. How many pills would Gilead sell?
5. Suppose Gilead’s patent on the drug is about to expire. How much would Gilead be willing to pay to keep its monopoly?   You may use a graph to illustrate your answer. Explain.

Answer 1

Q = 10,000 - 100P

P = 100 - 0.01Q

MR = dPQ/dQ = 100 - 0.02Q

MC = 1

A) A monopoly maximizes profits by setting output at the point MR = MC

That is, 100-0.02Q = 1

99 = 0.02Q

Q* = 4950

B) Substitute given value of Q in demand curve to find P:

P = 100-0.01(4950)

P = 50.5

Profit = (P-MC)Q = (50.5-1)4950 = $245,025

C) Perfectly competitive firms produce output at the point P = MC

100-0.01Q = 1

Q' = 9900

D) P = $1

E) Amount Giliad will be willing to pay to keep its monopoly are the additional profits made by it being a monopoly

Thus,any amount less than $245,025 will be offered by it to maintain its monopoly powers