Acme Drug Co. has a patent on the drug A-rene, the annual demand for which can be described by the demand curve:
Q = 4500 - 300P.
Production of the drug requires an annual fixed cost of $3,000 and a per unit marginal cost of $5.
(i) How many units of the drug will Acme produce each year, and what price will it charge, in order to maximize its profits? What will be its annual profits?
(ii) Now suppose that the Better Drug Co. has discovered B-rene, a new drug which seems to be identical to A-rene in all its effects. If Better enters the market, competition with Acme will conform to a Cournot duopoly. Better’s costs are identical to those of Acme. What would be the equilibrium outcome of this duopoly? Specifically, how much would each firm produce and what would be the price? How much profit would each firm make? Would Better find it profitable to enter the market?
(iii) Would it be in the interests of society as a whole for Better Drug to enter into production? Identify the gainers and losers from Better's entry.
(iv) Suppose instead that, if Better enters the market, Acme plays as a Stackelberg leader. What would be the equilibrium outcome in this case?