Many large pharmaceutical companies spend billions of dollars every year on the research and development of new drugs.
a) (10) Suppose a pharmaceutical company estimates that if they spend $1 billion on the development of a new drug, they can expect to earn $100 million in accounting profit as a result (so their stream of future revenue would be $100 million higher than all of their explicit costs, including the R&D costs). Just based on this information (that this company can expect to earn $100 million in accounting profit from this drug), does this necessarily indicate that this company should develop this drug? What does the decision of whether to invest in this new drug (or another) depend on? Be specific in your answer.
b) (5) Some people have criticized pharmaceutical companies for not investing heavily in drugs that could treat debilitating illnesses like Tourette syndrome or muscular dystrophy. Why would pharmaceutical companies be willing to invest more heavily in drugs that treat say, erectile dysfunction or hair loss, than these highly debilitating illnesses? What could the government do to address this issue?