2. Consider a pharmaceutical company considering research and development of a new drug. Theyestimate that demand for this new, innovative product (the only of its kind) is given by p = 200-q,and the firm knows that once the drug is developed it can produce as much as it would like at aconstant marginal cost of $10 (this implies a cost function of c(q) = 10q).(a) What is the monopolist's profit-maximizing price and quantity produced, pm and qm if theydevelop the drug? Be sure to include a well-labeled diagram!(b) If the firm expects that the R&D will cost $10,000, should the firm pursue this product innovation?(c) What is the most the firm should be willing and able to spend on this innovation?(d) What is the socially optimal quantity of output, q*?(e) What is the value of the innovation to society if it was competitively/efficiently supplied?(f) Calculate the deadweight welfare loss we should expect if the firm produces the new drug as amonopoly.

Answered: 2. Consider a pharmaceutical company…

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter15: Imperfect Competition

Section: Chapter Questions

Problem 15.2P

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2. Consider a pharmaceutical company considering research and development of a new drug. They
estimate that demand for this new, innovative product (the only of its kind) is given by p = 200-q,
and the firm knows that once the drug is developed it can produce as much as it would like at a
constant marginal cost of $10 (this implies a cost function of c(q) = 10q).
(a) What is the monopolist's profit-maximizing price and quantity produced, pm and qm if they
develop the drug? Be sure to include a well-labeled diagram!
(b) If the firm expects that the R&D will cost $10,000, should the firm pursue this product innovation?
(c) What is the most the firm should be willing and able to spend on this innovation?
(d) What is the socially optimal quantity of output, q*?
(e) What is the value of the innovation to society if it was competitively/efficiently supplied?
(f) Calculate the deadweight welfare loss we should expect if the firm produces the new drug as a
monopoly.

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Since you have asked a question with multiple sub-parts, we will solve the first three sub-parts for you as per our authoring guidelines. Please post the rest of the sub-parts separately or mention the subpart for which you require the solution.

Monopoly is a kind of market structure in which the number of firms is only one. It implies that the whole market has only one seller of the concerned good. Smaller the number of firms in the market, higher is the market power possessed by the firms.

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