HAP-425-DL1 & 001 — Fall 2022
Prof. Phillip C. Zane
Week 3 Assignment: Market Structure and the Pharmaceutical Industry
Homework problems:
o Ge
no or
t s ge
ha M
re as C
or on op
up U yri
lo niv gh
ad er t 2
w sity 02
ith & 2
ou P
t w hi
rit llip
te C
n .
pe Za
r m ne
is
si
on
1. Market Structure
List the most important characteristics of each of the following types of market. Be sure to
explain how the price of the relevant good or service and the quantity of goods or services (level
of output) are determined. Are there a few sellers or a lot of sellers? Identical products or
differentiated products? What can you say about profitability in the long- and short-run?
a.
b.
c.
Perfect Competition
Monopolistic Competition
Monopoly
2. The Pharmaceutical Industry
A pharmaceutical company, Drugs ‘R Us, develops a new drug, Worrynomore, that cures a
prevalent and previously untreatable condition called hypochondriatus. No other drug has been
shown to be effective in treating this disease. Drugs ‘R Us files an application for a utility patent
with the US Patent & Trademark Office (PTO). The PTO is satisfied that Worrynomore has
satisfied the requirements for a patent (it is new, useful, and nonobvious), and issues the patent.
a. How long does the typical utility patent last? (Hint: The textbook says that the patent runs
for seventeen years from the date the patent is issued by the PTO, but this is not correct
because the law was changed about thirty years ago). Why is this the length of a patent
term? Why not longer? Why not shorter?
D
b. Suppose you are working as a consultant for Drugs ‘R Us. The firm hired you to
determine the optimal price and quantity of Worrynomore. You complete a study of the
relevant market and estimate the demand function to be:
𝑝𝑝 = 50 − 2𝑄𝑄
From this, you can derive the Marginal Revenue function:
𝑀𝑀𝑀𝑀 = 50 − 4𝑄𝑄
HAP-425-DL1 & 001 — Fall 2022 — © Prof. Phillip C. Zane & George Mason University
Page 1
[Extra credit: What is the relationship between the demand function and the marginal
revenue function? How can you derive one from the other?]
You learn from the accounting department that the cost of producing Worrynomore can
be stated as
1
𝐶𝐶 = 100 + 𝑄𝑄 2
2
The cost function allows you to derive the Marginal Cost:
o Ge
no or
t s ge
ha M
re as C
or on op
up U yri
lo niv gh
ad er t 2
w sity 02
ith & 2
ou P
t w hi
rit llip
te C
n .
pe Za
rm ne
is
si
on
𝑀𝑀𝑀𝑀 = 𝑄𝑄
How many Worrynomore pills should Drugs ‘R Us manufacture and sell? At what price?
c. Assume that Drugs ‘R Us produces Worrynomore at your suggested price and quantity.
Based on your models (the equations you have been using) what will the profit be?
d. Drugs ‘R Us follows your advice; they’re very happy with your advice and give you a
sizeable bonus. When you tell this to your friend, she asserts that the Drugs ‘R Us
“monopoly” is “bad for society.” Why might your friend feel this way? What would you
say in response to your friend?
e. There are some undesirable side effects of Worrynomore if it is not used correctly to treat
hypochondriatus. What kinds of regulations can the government impose to minimize the
occurrence of these side effects?
f. A very rare condition is discovered that is similar to hypochondriatus but neither
Worrynomore nor any other currently available drug is effective in treating it. Because
the condition is rare, Drugs ‘R Us does not think the profits will be high enough to recoup
its investment if it tries to develop a new drug, even if it can patent the new drug. Besides
allowing pharmaceutical companies the opportunity to apply for and receive patents,
what else can the government do to encourage Drugs ‘R Us to invest in developing a drug
for this condition?
D
g. (Extra credit) “A patent grants the exclusive right to make, use, or sell the patented
product or process, but a patent rarely creates a monopoly in the sense that economists
use that word [the power to control price].” Is this statement true or false with respect to
pharmaceutical patents? Why?
HAP-425-DL1 & 001 — Fall 2022 — © Prof. Phillip C. Zane & George Mason University
Page 2
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
