Question

in march 2019, purdue pharma reaches a $270m settlement in a lawsuit, filed by oklahoma, which claimed its opioids contributed to the death if thousands of people. What is the effect of lump-sum 270m expense on the purdue pharma supply curve of opiods

Answer 1

Supply curve will not change.

The large pharma firm operates in a market structure where it faces a downward sloping demand curve. Profit-maximizing output is determined by equality of marginal revenue (MR) and marginal cost (MC), where MC curve is approximated to be Purdue's supply curve. Since MC is the ratio of change in total cost (TC) to a change in output, an increase in fixed cost does not impact MC, therefore supply function remains unchanged. Profit maximizing output and price will not change, but due to the one-time increase in fixed cost, the relevant period's profit will be lower.